Weekly eLetter 5/5/2023 – Good Times Before the Pain?
A hot topic around our office is the phenomenon of self–fulfilling prophecies — specifically those that have an over-arching effect on the markets and/or the economy in general.
One example, from two years ago, there was a question of the likelihood of inflation being persistent vs temporary. While there were many contributing factors, supply chain interruptions were a major feature in pushing up prices. So, it was sensible to think that once the supply lines returned to stability, that particular inflation pressure-point would be relaxed. However, as we pointed out at the time, the main thing that would support the ‘persistence’ argument was that if consumers ‘accepted’ higher prices there would be little market pressure to reduce those prices. That is what happened: consumers continued to support the ‘demand’ side of the equation thus giving no incentive for the ‘supply’ side to make a better offer, i.e., lower prices.
There is a contradiction present in how consumers react to inflation. Part one is what everyone focuses on: higher prices will (ultimately) slow the economy. Part two is sneakier: rising prices are also an incentive to ‘buy now before things get even more expensive’. That translates to what we might call ‘inflation tolerance’. And that, IS temporary.
Another self-fulfilling prophecy is now front and center in the conversations of markets and economies: “Is a recession unavoidable?” What concerns us is that if forecasters keep telling us (purchasing managers and consumers primarily) that ‘there ‘WILL’ be a recession we may adjust our behavior in ways that are likely to produce a recession. Ironically, the forecasters continue to be surprised as data continues to come in showing a rather robust economy with not a lot of weakening, if any.
So, let’s put on our thinking caps and try to answer the question of ‘If there IS an impending recession, should we disfavor equities until the storm is over? Or, is there a near-term opportunity? Well, it is really hard to get the tea leaves to align in a way that answers that question. However, in a piece for Bloomberg on 27 April, Nir Kaissar writes: “According to the National Bureau of Economic Research, there have been 30 recessions since 1871, the longest period for which performance data is available for the S&P 500 Index and its predecessor compilation of US stocks. I looked at how the S&P 500 performed six months before each of those recessions and found that it produced a positive total return 21 times.” That’s certainly something to keep in mind. Also, something else to keep in mind is that the likelihood of a recession is in no way a slam dunk. According to various surveys, 30% or more of economists think a recession may be avoided entirely. In general, our opinion – which may be subject to change – is that if there is a recession it is not likely to be severe. *https://www.bloomberg.com/opinion/articles/2023-04-27/personal-finance-stocks-beat-cash-even-if-you-could-time-a-recession#xj4y7vzkg
Ron’s Market Minute — What’s a Portfolio Manager to Do?
The information we get from the Federal Reserve, or ‘Fed’, is often delayed and not very helpful for predicting the stock market. Even when the economy is doing poorly, the Fed may not realize it until after it’s already getting better.
Right now, the stock market is giving mixed signals. Although the three main stock market indicators went down last month, the SPY, which is the leader, actually went up a little bit during the month. This is a good sign for us to try to find some positive returns, but it’s hard to figure out which sectors are going up and which ones are going down over more than a very short timeframe.
It’s especially confusing because some usually defensive sectors, like healthcare and utilities, are going up along with the more aggressive tech and communication sectors. This makes it difficult for portfolio managers to figure out what to invest in.
At a recent conference for financial professionals (CMT* 50th Anniversary convention this past week), most people agreed that the stock market could stay range-bound and just tread water for the next 6 months or more. So at this time, in addition to being hedged against big negative changes, we are looking for strong companies within the sectors that are doing well. For example, even though financial companies, as a whole, aren’t doing well, some insurance companies are doing better. We are looking for those companies and similar ones in other strong sectors. Even if the stock market doesn’t do well in general, we are optimistic that we can find positive returns by choosing specific strong companies instead of just investing in the overall stock market indexes.
*The CMT Association is a non-profit, global, professional organization of technical analysts.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
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