Weekly eLetter 6/2/2023 — Gertrude Stein Revisited
(Today’s commentary is a reprise from July 2022)
“A rose is a rose is a rose.” So said Gertrude Stein commenting that, whatever one chooses to use as a labeling description, the choice of nomenclature has no impact on what a thing may actually be. Funnily enough, the phrase is a bit of a misquote, the original being “Rose is a rose is a rose.” The first ‘Rose’ is a woman’s name, the next refers to a flower. The subsequent circularity is likely just paronomasia. Such wordplay annoys some people. You probably know someone who thinks the phrase “It is what it is.” is the linguistic equivalent of fingernails on a chalkboard.
Why do I bring this up? Well, I’m glad you asked.
t is simply because we always search for relevance in our weekly missive to you. And the big word in the news this week is ‘recession’. That’s recession as in are we having one, going to have one, or have we just had one? And, what makes a recession anyway?
Most of the media has been tossing around the word as if it is some sort of harbinger – a forecast of the end of the world as we know it. A lot of this is more political propaganda than it is useful stuff. And…since Recession is the big evil some pundits (and news-people) have leapt to the conclusion that 1) we are having one and 2) it’s Biden’s fault. The Whitehouse has responded by saying 1) We are not having a recession and 2) things are rosier than is popularly believed. Here’s the underlying truth that makes the discussion complicated — and why it has become political fodder.
The popular belief is that, by definition, a recession comes into existence when you have two consecutive calendar quarters of negative growth. In reality, that is only part of the equation. That this reduced version of the definition has become the de facto standard is likely due to the laziness of the media and political types. And this is where we get tripped up. Einstein famously quipped that “You should explain things in the simplest of terms, but no simpler.”
The ‘Official’ arbiter of identifying recessions is the National Bureau of Economic Research. This is not a government agency and they decided among themselves to be in charge of naming some stuff. Their website describes the NBER this way:
The National Bureau of Economic Research is governed by a Board of Directors consisting of 51 members from leading North American research universities, economics professional organizations, and the business and labor communities. The NBER seems to do a very good job of what they do, so no one takes issue with their findings. We’re good with that too. Interestingly here is how they actually define the condition of recession:
“…a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Noteworthy is the bureau’s economists, in fact, profess not even to use gross domestic product, the broadest measure of activity, as a primary barometer.
To close our commentary for today, we shall turn to Dean Baker, co-founder of the Center for Economic and Policy Research. Dean says “The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month.” It’s hard to challenge Dean on that.
Ron’s Market Minute – This Discrepancy Has Been Troubling Me
We talk about odd things in the markets and even more so of late it seems. So, here’s another anomaly to do a little thinking on.
Have a look at this chart and then read on why I think the chart has something interesting to say.
Both lines are charts of the S&P Index* as denoted by ETF’s (exchange traded funds) that basically imitate the S&P Index.
Note that the two data traces are VERY different: One goes strongly up, and one goes strongly down.
Although both of the trend lines are comprised of holdings of the same stocks, the difference is in the weighting of the stocks inside of the ETFs.
SPY is the index that people are generally more familiar with. A very important characteristic of this index is that the stocks are capitalization-weighted where price moves by large components have an outsized effect on the value of the index. RSP, on the other hand, is an index that is equally weighted. In other words, the performance of the smallest stock in the index has the same weight as the largest stock.
The difference in performance this year has been dramatic. We might even say DRAMATIC! The SPY (cap weighted) is up almost 10% so far for the year while the RSP (equally weighted) is up less than one half of one percent. And it’s also obvious that SPY is trending up and RSP is trending down. When one peaks under the covers, is becomes obvious that only a very small number of the very largest stocks are driving the return of the SPY (cap weighted index). In a ‘normal’ healthy market environment these two variations on the S&P Index will be going in the same direction — not necessarily at the same pace — but in the same direction.
This year the ‘well-diversified’ investor is lagging significantly behind the investor who has grabbed onto one or more of the handful of stocks that are driving the performance. This is more than a bit unusual. And it’s not a healthy market. Over some period of time, they will very likely converge as they always have in the past. And EITHER the SPY (cap-weighted) will fall to match the direction of the RSP (equal-weight) or the RSP will rise to play catch-up with the SPY. Which will it be? They crystal ball is cloudy on this issue.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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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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Past performance is not a guarantee of future returns – LFS-5390884-123022