Weekly eLetter 4/14/2023 – Trading Places?

“Out with the old, in with the new.” Or is it, “Out with Inflation, in with Recession”? Or is it, “Who needs all this grief anyway?”

The ‘it’ in this case is: “What is the title-holder for Dominant Theme Among Stories Being Written by Financial Journalists?”

For months, the main headline-grabber has been Inflation. Playing understudy is Recession, but so far that fellow is mostly a specter; a thing threatening to appear in the future. With new data out this week, it may be time for Inflation to realize her power is waning — center stage will have to be turned over to another actor. A case in point is our Thursday rally, which was driven by, among other things, the Producer Price Index showing the sharpest monthly decline in wholesale prices in nearly three years, providing further evidence of cooling inflationary pressures.

Although the consensus (of those whose job it is to know these things) is that the United States economy will fall into recession – at some point that is not too far away. Or, more precisely, before the end of 2023. If not then, maybe Q1 ‘24. How sure of this are they? It kinda depends on which group of gurus you ask. An outfit called the Conference Board is considered to be pretty good at this and they put the likelihood at 99%! (https://www.conference-board.org/research/economy-strategy-finance-charts/CoW-Recession-Probability ).

Now, to help your eyebrows settle back to where they are supposed to be, let me refer to a statement made by the same Conference Board back in September: “The Conference Board predicts a 96 percent likelihood of a recession in the US within the next 12 months, based on our probability model. This supports our expectation of a recession before the end of 2022 caused by the Federal Reserve’s interest rate hikes.” (https://www.conference-board.org/topics/recession/US-recession-probabilities-reach-96-percent ). Clearly, that did not happen.

So, how is it that the guys with all the data – and a reputation of reliability – can be substantially off the mark?  We all need to calm down because they have an explanation: “This is consistent with our view that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023. While US GDP growth defied expectations in late 2022 and early 2023 data has shown unexpected strength, we continue to forecast that GDP growth to contract for three consecutive quarters starting in Q2 2023. Despite better-than-expected consumer spending recently, the Federal Reserve’s interest rate hikes and tightening monetary policy will lead to a recession in 2023.”

So, the reason we must have a recession is ‘economic weakness will intensify’ and ‘Federal Reserve’s interest rate hikes and tightening monetary policy will lead to a recession’. But ‘economic weakness’ does not appear to be cooperating. The labor market is down a bit but not suffering (nearly 10 million jobs remain unfilled**). Consumer confidence was actually UP in the last report (University of Michigan survey)*. And, paradoxically, the Conference Board’s explanation of Fed wizardry seeks a self-fulfilling prophecy. They comfortably claim that ‘interest rate hikes and tightening monetary policy are what will cause the recession” reveals what is on the other side of the Fed coin: If the Fed does NOT do those things — then there will NOT be a recession. If the intent of the induced recession is to slay the Inflation monster, then it follows that, absent the monster, the ‘need’ for a recession vanishes.

OK, I should mention that there is another bugbear that has the pro-recessionists in a tizzy and that is a fear of weaknesses in the banking sector. This is a concern focusing mostly on regional banks who tend to be small to mid-sized. The thinking goes that their size makes them extra vulnerable to stress. But that data point is also not cooperating. To wit, the level of confidence in the regional bank sector can be found in the SPDR S&P Regional Banking ETF (ticker KRE). KRE unsurprisingly dropped a bunch on the heels of the collapses of Signature Bank and Silicon Valley Bank. However, in recent weeks, it (and the sector it represents) seems to have found some solid ground. Indeed, with Thursday’s rally, KRE is less than a Krispy Kreme donut away from trading above its 20-day moving average. Traders see such things as good news. And that’s the view from our chair.

* http://www.sca.isr.umich.edu/

** https://www.bls.gov/jlt/

Ron’s Market Minute – Some Thoughts on Market Resistance

The current state of the financial markets looks to me to be one of cautious optimism, with several trends emerging that are providing support for stocks and other assets. Two of the most notable trends are the downward trend of the 10-year Treasury yields and the strength of the US dollar, which are both giving stocks a tailwind.

As a result of these trends, gold and gold-mining stocks are at new all-time highs, leading to a surge of excitement among gold bugs who are eagerly buying the precious metal. However, the high price of gold means that it may not be the best investment opportunity for those who are looking for a bargain.

Meanwhile, many areas of the S&P index are approaching or at the highs from last August, which could potentially act as resistance. This is particularly true for technology and communications stocks, which are both approaching prior highs. When sectors are at prior resistance, it tends to lead to a choppy market.

Within these sectors, internet stocks and semiconductor stocks are still the outperformers. This is because these industries have been at the forefront of technological innovation and have benefited greatly from the shift toward digitalization and remote work.

Overall, the current state of the markets is one of cautious optimism, with several trends providing support for stocks and other assets. While we are continuing to find strength in smaller areas, we suggest that investors should remain vigilant and do their due diligence before making any investment decisions, as these types of markets can be unpredictable and subject to sudden shifts.

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
www.denkinvest.com

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