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Tougher times are likely ahead for the markets, and investors must be courageous

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., November 9, 2022. 

Brendan Mcdermid | Reuters

It’s a wonderful time of year and a very strange time for the markets and the economy. As we await the most anticipated recession in history, things aren’t awful.

The S&P 500 closed at its lowest level of the year on Oct. 12 when it was down nearly 25% for 2022. Since then, it has rebounded sharply and is now off by about 15%. Earnings continue to increase and expand, though some companies have missed Wall Street’s expectations and have been punished. This week, a company reported strong results on the top and bottom lines but suggested that its full year would likely be on the low-end of the forecasted range, and the stock fell. When investors are nervous, there are fewer safe places to hide.

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Investors probably should continue to feel nervous. Though most seem desperate for this downturn to be over and for the Federal Reserve’s rate-tightening cycle to end, the wanting won’t make it happen. Despite some decent earnings numbers, there are troubling historical indicators that strongly suggest an upcoming recession.

Recessions follow patterns, and all are defined by contractions in various types of economic activities and measures. On average, stocks fall about 30%, and earnings for the S&P 500 shrink by 20%. Because these are averages, the actual numbers may be greater or less. Perhaps the roughly 25% bottom on the S&P 500 will hold, or maybe lower lows are ahead. Inflation is slowing, but it rarely slows meaningfully without an increase in unemployment. That hasn’t happened yet, and maybe it won’t. If it doesn’t increase, it would be rare enough to be considered aberrational. I’ve never thought it wise to expect aberrational. I expect the unemployment rate to approach 5.5%. Historically, that’s not a bad level.

Consumers represent two-thirds of the U.S. economy, and they have been spending. That’s nothing new. U.S. consumers spend more reliably than almost any other type of consumer in the world. They feel somewhat positive because of wage gains and larger paychecks. The problem is that the larger paychecks trail the larger grocery and gasoline bills. As a result, consumers feel positive about affording less. Moreover, this positive vibe is quickly confronting eroded savings accounts and soaring credit card balances. To wit, the consumer is running out of spending money, while prices for rent, food and health care continue to rise.

When I’m on CNBC, folks on Twitter provide running commentary about most everything any of us has to say. Comments are all over the place, but a constant is disdain, derision and insults for comments that sound negative. It is baffling. What is one supposed to say about a dark and cloudy sky? The response seems foolish and just wrong.

To be clear, markets have been contracting for most of this year after peaking in January. This has not been pleasant, but it hasn’t ushered in the apocalypse, either. Most important for those who wish to remain clear-eyed is that it isn’t over. Perhaps history’s lessons will prove wrong, and the worst may be over. In my 35 years in this business, I have benefited most from dispassionately focusing on data. The data is what it is. Should the world not end, I expect that my investments will be worth more as the economy recovers and corporate America resumes its expansionary path.

Over the past ten years markets have more than doubled, and most investors have done well. Risk taking is best left to others and so is cowardice. Difficult markets and economies require courage and an abiding optimism to endure tough times and look forward to sunny skies.

There will be five of us for Thanksgiving dinner this year, and a 12-pound turkey will do the trick. I will count my many blessings and hold each of you among them. Thank you for your friendship, loyalty, support and kindness these many years. I’m grateful to be an American and believe that America’s future is brimming with promise and wonderful, profound possibility. We will make it through together.

— Michael K. Farr is a CNBC contributor and president and CEO of Farr, Miller & Washington.

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