September 2022

September Newsletter


Much of what I write about has to do with economic cycles…for a reason. It affects everyone sooner or later and markets very quickly. So, let’s talk about the contemporary economic and financial market cycle we have and are witnessing daily. It’s been a weird cycle so far. To put “it” in short-term, historic context, “it” is the heavy-handed COVID shutdown.  I’m referring to what policy makers, pastors, parents, and the public might call the “Oh-I-wouldn’t-do-that-again,” policy. That would be the mistake of the century.  Even China is now about to suspend their zero-COVID policy. The expense to world domination is just too great, and most all of you got it anyway including both presidents and the heads of the CDC.

The U.S. shutdown produced the biggest post-war bust in both real GDP and employment. This was followed almost instantaneously by an incredible boom! The current economy is characterized by unprecedented use of monetary stimuli as well as fiscal injections from central banks around the world and low bond yields that have never been seen at this level.

The economy has always been a bit of a mystery, but lately it seems to have taken on a life of its own. People are questioning whether the data being released is accurate anymore. Take the example of growth rates. Prior to 2020, the difference between real GDP output and real GDP based on income was only 0.6%. But since 2020, that variance has averaged 1.4%, and it’s not just growth rates that are affected. Companies are now hiring even in times when GDP is declining. Some people are starting to wonder if we’re even living in the same world as before. Is something happening behind the scenes that we’re not seeing, or is this all just a coincidence?

When consumer sentiment plummeted to an all-time low, many experts predicted doom and gloom for the economy. But in the face of this extreme consumer trepidation, growth in real personal-consumption expenditures was still strong at 1.6%. When you look at nominal consumer spending, it climbed at an annualized rate of 10.7%.

So, what does this mean for the average American? It means that while consumers may be nervous about the future, they’re still willing to spend money. This is good news for businesses and the economy.

In the long history of the stock market, bonds have always been there to pick up the slack when the Bear comes out to play. Investors know that, in a bear market, they can count on bonds to outperform stocks. This time was different. For the first time ever, bonds failed to beat the Bear in the current bear market. Bonds have lagged stocks during each stage of this latest bear market. So, what is the reason stocks outperformed bonds in today’s bear market? Could it be that the 10-year bond yield started this year at about 1.5% (near a record-low coupon buffer) and has nearly doubled, giving the Fed ammunition to lower rates in the recession? Where could rate cuts take us to in the next recession? Rates falling back to 1-1.5%? This would send us back to Groundhog Day, a precursor to fears of overheating the economy again. In such a climate, stocks again beat bonds. What may determine whether we shift into Groundhog-Day cyclicality is inflation. That brings us to the stickiness of housing inflation.

When looking at the housing market, it’s important to look at more than just the prices of homes. The mortgage-yield spread and the corporate junk-bond spread can be telling indicators of how healthy the economy is. Right now, it looks like we’re in for a recession – but maybe not in today’s Bizarro World. In past recessions, when mortgage spreads widened, so did junk-bond spreads. However, that’s not been the case recently. Mortgage spreads have ballooned to levels close to the 2008-09 and 2020 recessions, while junk-bond spreads are below past recession readings. So, what does this mean? It could mean that we’re in for a different kind of recession – one where the housing market leads the way down instead of following suit. Or it could just be an anomaly caused by all the crazy political happenings lately. Only time will tell!



The economy is in a strange place right now. The stock market is doing relatively well, but the housing market is in trouble. Some people are saying that we’re headed for a recession. But there are signals suggesting that everything will work out just fine over the course of the cycle. There’s been a lot of talk about the mortgage spread lately. It’s been getting wider and wider, and some people are saying that it’s a sign of a housing recession, but that may not be true. Despite what you may have heard, a housing recession is not always followed by a broader economic recession. In fact, if done correctly, it could lessen the pain of a housing recession. Don’t get me wrong – a housing contraction can complicate things when it comes to the economy. It’s important to remember that there is no one-size-fits-all rule when it comes to recessions. Take today’s economy for example. Even with the housing market in decline, we haven’t seen the same level of devastation as we did during the last recession. That’s because other aspects of the economy are doing well enough to offset any negative impacts from the housing market.  A housing recession may be unpleasant, but it doesn’t mean that the entire economy is headed for disaster.

TINA and Valuations

That brings us back to the lesser world we know as TINA. There is No Alternative, to stocks, at good value. So, what are valuations today? It’s no secret that the stock market has been in a different world since 1990. Price-to-earnings ratios have been much higher since 1990 than before. In fact, it has traded at over 20 times earnings most often. This dramatic shift means that investors are paying much more for stocks than they used to. As you might expect, that comes with some big risks. If you’re thinking about investing in stocks, it’s important to understand why the market is valued the way it is. Be prepared for wild swings in prices – both up and down.

In the old world, stock market valuations were based on how much a company earned. If it made a lot of money, the stock was worth more because people believed that the company would continue to make money in the future, but in the brave new world, stock market valuations are based on how much a company could make in the future. If a company has a lot of potential for growth, its stock is worth more because people believe that it will be able to make even more money in the future.

This change has led to stocks being valued much higher than they used to be. In fact, today’s stock prices are near 18.7 times what these companies earn, which is significantly higher than valuations from 1950 to 1989, though lower than the average from 1990 to present day. Allow me to identify that many analysts now predict that earnings for the S&P 500 will come in at $210 for 2022. At 18.7 times these earnings, fair value for the S&P 500 should show a valuation of 3927. As of this writing, the S&P 500 is trading at 3973.

Dry Powder

It’s no secret that Americans are nervous about the future. The pandemic has caused a lot of uncertainty, and people are eager to protect themselves and their families. So, it’s not surprising that we’ve seen a surge in cash holdings in recent years. People want to make sure they have enough money to cover any potential emergencies. Whenever confidence falls, people tend to stockpile cash. The amount of cash held by consumers is at an all-time high right now. This is a clear sign that people are worried about the future and want to be prepared for anything that might happen. I’m confident that Americans will continue to be prudent in these uncertain times and will keep their savings safe and secure.

It’s been a few years since the economy has seen any real growth. People are starting to get antsy, waiting for the next recession to hit, but there’s one group of people who seem to be doing just fine, the cash hoarders. No one really knows why they’re doing it, but everyone has their own theory. Some say that they’re preparing for the worst, while others think that they’re trying to manipulate the market. No one really knows for sure. What we do know is that this is happening at a time when the economy is on shaky ground. Could this be a sign that things are about to take a turn for the worse? Or is this just a coincidence? Today’s elevated cash level probably does not characterize a new way of thinking so much as an untapped source for economic growth that may compel many to alter their views that a recession is unavoidable.




Vaughn L. Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037



Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0276.


Leuthold Group