Weekly eLetter 3/24/2023 — Glide Slope to Recession?

A key question on ‘The Street’ is “Recession: Yes, or No?” Parallel to that is another question: “Hard Landing. Soft Landing, Delayed Landing or No Landing?” No one should be surprised that there is precious little agreement among the experts on the answers to those questions. If there is any leaning at all, it appears to be ‘yes, we will move into recession, but it won’t be deep or long’. Still, even if the policymakers are wrong – as they way too often are – it’s a good idea to know what they are thinking. After all, good policies and bad ones alike tend to have an impact on all of us. With that in mind let’s take a scan of the horizon to see what the Movers and Shakers are moving and shaking.

The biggest and scariest bugbears continue to be 1) inflation and 2) concerns of weaknesses in the banking sector. Appropriately these are the things policymakers are most focused on. And these are worldwide worries.

In a speech in Edinburgh, Scotland earlier today European Central Bank Member and German Bundesbank president Joachim Nagel tried to calm fears about a sell-off of bank shares but was quick to pivot to inflation saying, “Wage developments are likely to prolong the prevailing period of high inflation rates. “He added “In other words: Inflation will become more persistent.” Reaction across the European markets was swift and negative – UK, France, Germany, Italy, Spain all down about 2% as I write these words.

Here at home St. Louis ‘Fed Head’ James Bullard (a guy The Street pays a lot of attention to) gave a speech in which he seemed to reinforce a point made by Powell earlier in the week. That is that some of the fallout of the banking problem (generated by the high-profile collapses of Silicon Valley Bank and Signature Bank) has actually had a market-effect on interest rates. This essentially has done some of the Fed’s work for them. Bullard put it this way, “Financial stress can be harrowing but also tends to reduce the level of interest rates.” He said, “Lower rates, in turn, tend to be a bullish factor for the macroeconomy.” — “This may help to mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress.”

Bullard also added one bit, which could be looked at two ways; one good and one not so good. You may be aware that the Fed thinks the Phillips Curve is an actual thing and, if it is, then an increase in unemployment will cause a fall in inflation. So, is he thinking that a ‘strong labor market’ is a good thing or a bad thing? (Normally, of course, it would be a good thing, but if the dominant need is a lowering of inflation, then maybe it’s a bad thing.) Here’s his quote: “performance remains strong. “Normally, a strong labor market bodes well for consumption expenditures, the largest component of GDP,” he said.

You can be forgiven if you are thinking that ‘Gosh, it would be better if these Movers and Shakers would do a bit less of each.

As the army of experts rushes forward to tell us that the “banking system is sound and resilient” we also hear the echoes of the ghost of former Fed Chair Ben Bernanke telling us in 2007, “we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Movements in interest rates may, at times, impact unseen dominoes.

Here’s the problem: the financial markets can be very intricate and complex, but there is one underlying truth: A healthy market must have a collective belief in the opportunity to buy the future at a discount. Absent that, there is little motivation to participate.

We’ll leave you with this thought: Warren Buffet famously says, “The Sun is always shining somewhere.” Right now, our job is to be the weatherman.

Ron’s Market Minute – What’s Next?

If you’re like many people, you may be feeling a bit overwhelmed by all that is going on the world at this time. Between bank failures, extreme market volatility, taxes, and talk of a possible recession, it’s hard to know what to think.

The US Markets have gone through some pretty serious rotations over the past few months. In October, when things looked rather dismal, the Finance sector sprinted up and away off the market lows – but over the past four weeks that sector has completely fallen apart.

Since the beginning of October, it was Healthcare and Defensive groups leading for about two months…and those areas have been largely underperforming with strong selling over the past three months.

Right now (before markets open today) the tech and communications sectors appear to be relatively strong, and semiconductors and chips are once again showing their muscle.

The small caps that surged in January are the laggards this month – noticeably so.

While stocks that make up the S&P Index* (usually thought of as ‘the market’) are about flat for March, the small caps are down about 8%. (Not a typo!) Meanwhile the regional banks as a group are down about 28% so far this month. (Also, not a typo- glad we don’t have any exposure there!)

This is a market of huge swings, not extended trends. And in a matter of days, we hear media moaning that we ‘could’ have bought more stocks when they were cheaper turning to, we could have ‘avoided some stock sectors’ before the recent malaise. In this environment, a minor pullback in a sector can turn into a double-digit decline in short order.

While rotations and swings are expected, it is unusual for large caps and small caps to behave so very differently. This has my attention. In a ‘normal’ market environment stocks move overall in the same direction, and when large caps go up, small caps do, as well (although they might move in different magnitudes). Which leads me to postulate that either the small caps will turn up and follow their big brothers, OR the big brothers will turn and follow the small caps down.

I feel that it continues to be a time of patience and caution. On those upswing days we’re not keeping up, and on the downswing days we’re glad to be not ‘keeping down’. The days of trends lasting a few months to a couple of years seem to have gone on vacation…for a while. We’ve seen times like this in the past, and they eventually come to an end and the world (or markets, at least) return to some semblance of normalcy. We’re looking forward to that time.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


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