Hard or Soft Landing

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Several years ago, a sports reporter had a great idea.  Each year, they would “retire” some worn out, overused sports cliché, like “smash mouth” football or we play the season “one game at a time.”  In the economic drama that has unfolded over the current Fed tightening cycle, the appropriate economic cliché to retire for 2022 might be the “hard or soft landing.”  The idea behind the analogy is that the Fed is trying to tame inflation while also not hurting a strong economy too much.  Like landing an airplane, can the Fed accomplish the goal of lowering inflation while simultaneously steering the economy into the preferred soft landing?  Not only am I tired of hearing the analogy, but I am tired of hearing everyone’s opinion on which type of landing we are going to have and why.  They all have a personal forecast and history has proven that most all economic forecasters will be wrong.

As I prepared what to write now that the markets are retesting the June financial market lows (and after a bruising month of September), I think the focus on which type of landing is all wrong.  I prefer the quote made famous by Gerald R. Massie after crashing his B-17: “Any landing you can walk away from is a good one.”  Regardless of the type of landing, the economy will land!  Hopefully the Fed makes it a modestly painless event, but even if they make mistakes and cause more pain than necessary, the economy will come back.  I don’t know the exact number of recessions since the 1920s or the number of Fed-induced slowdowns that worked well versus poorly.  I do know the US financial markets have recovered to new highs 100% of the time, eventually.  The hard part is the waiting.

RELATED: Read how to make the right financial moves during market volatility.

After working in every market cycle since 1984 and studying all past cycles, I know how this movie ends.  It has a happy ending.  We just don’t know whether we are watching a short film or a 3-hour-long blockbuster.  If we hold onto good investments, live within our means, and wait it out, our patience will be rewarded.  Just like long-term investors have been rewarded every single time in the past.  What we are going through is not “different” this time, it is just overdue.  After years of the Fed helping the economy, it has now reversed course and is intentionally trying to slow the economy down to lower inflation.  This process is typically felt in the financial markets first, then the business world.  The pain then passes, and the healing begins.  We don’t know if that healing will begin next month or next year.  However, we do know you must be invested to participate in the returns when they come.  The graph below from Capital Group shows the many market disturbances investors have endured over the past 35 years.

I have several clients who were pilots.  One of them was a Vietnam era fighter pilot.  He was so good that he was an instructor and taught other service people how to fly.  He told me that in his military career, he had about 5,000 landings.  Even as a good pilot, an instructor, he admitted he felt like he had just one perfect landing out of those 5,000.  Obviously, he walked away from all of them because he is still here in his 70s, but it is hard to make a perfect landing.  I suspect the Fed will not be perfect but based on what they have signaled to the markets, we are two-thirds of the way to a pause.  Some inflation data is already improving, and interest rates have risen meaningfully from historic lows.  This flight is close to landing, and it may be a bumpy landing, but we will walk away from it.  Long-term investors in the US financial markets have always recovered to higher highs.  We are working hard to help you get to the happy ending of the current movie.  Keep calm and carry on.

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Contact Michael K. Kauffelt, II, CFA

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