Why Watching Financial News Could Lead Investors Astray
The News Calling for Economic Doom: Should you listen?
Investors, turn on the TV and the financial news channels, watch for a few hours and soak in the opinions being passed along as news and you too will convince yourself a very bad recession is imminent. Geopolitical strife domestically and globally. Bank runs in Europe and regional bank runs here in the US. And the kicker, still “rampant inflation” if one listens to the parade of PhD economists and sell side strategists on the financial channels or writing in newsletters. I’ve been managing money professionally for almost 30 years now and I have never heard so many people so uniformly negative and confident in their economic opinions of forthcoming doom. Ignore the fact that almost all of them have been wrong on the markets the last 9 months and missed calling the “recession” we had in the 1st half of 2022. Ignore that many of these same people have been calling for a recession to begin in late 2022 since mid-last year. It’s may 2023 and we are still waiting.
Recession in the first half of 2022, Chris what are you talking about, you may ask. Well, I was taught early in my career that 2 consecutive quarters of negative real GDP growth was a recession. Pretty simple. No after the fact stamp of approval needed by a group of economists employed in taxpayer funded buildings. No waiting around for 3 or 4 quarters to find out. And during the typical recession stocks usually declined -25-35%.
What happened to stocks in the first half of 2022 as we printed two negative quarters of GDP growth? The S&P500 dropped -25% in nominal terms and almost -35% in real terms into our summer 2022 lows. Remember viewers that the NBER, National Bureau of Economic Research, didn’t declare the economic collapse we had during the 2nd and 3rd quarters of 2020 as recession until July of 2021, almost a year after the event. You want to wait around for them? Investors, trying to predict the beginning and ending of recessions is almost as difficult, and generally a waste of time, as trying to trade government data as it crosses the headlines.
Viewers, inflation is coming down fast. I know economists like to quote government CPI data. I like to take my cues from the markets. Here is a chart of 10-year inflation BE’s. This is the 10-year nominal treasury yield minus the 10 year real rate. This is what the market is pricing for inflation way down the road.
It’s dropped from a peak of 3% in early 1st quarter of 2022 when the Fed started raising rates to about 2.25% currently. Right at the top of the range that existed for almost a decade pre-Covid.
More interesting is the chart of the shorter term 2 year BE inflation rate. This measure rose from an average of about 1.5%, and a range of zero to 2.75% for the pre-Covid decade, to a peak of almost 5% in the second quarter of 2022. Here’s that chart.
As you can see, since mid-2022 when the Fed started accelerating its rate increases, this measure of inflation expectations has headed down fast. It now sits at just over 2%. Not far from the Feds goal. Lower trending inflation is good not bad for your money.
What is the market seeing that isn’t being presented to you on TV with many dire predictions for inflation and the economy? That for almost 2 years, the cumulative reported inflation data has actually been decelerating versus economist forecasts. Here is a graph of the Citi inflation surprise index that represents the sum of the difference between official economic results and the economist’s forecasts. This index led the CPI higher by 10 to 12 months in 2020 post covid reopening. It then peaked in August 2021, almost the same 10 to 12 months in front of the CPI peaking in June of 2022 and is now negative.
This combined with the historically symmetrical rise and decline of the CPI we’ve previously discussed in past cycles, puts the markets on course for more often than not better inflation data, not worse throughout the rest of 2023. Remember investors, stocks move around marginal improvement and or declines. Are things getting better or worse at the margin. Around the topic of inflation, things are clearly getting better for consumers. And while we aren’t currently there, goldilocks for stocks has been consistently boring 3-5% economic growth made up of a combination of 1.5-2.5% inflation and 1.5-2.5% real growth.
Here’s the weekly chart of the S&P 500.
No, I am not a chartered financial technician but with each passing week, this pattern continues to look more and more like a reverse head and shoulder bottoming pattern regardless of the economic prognostications on TV. Looking at the monthly S&P500 chart I cannot find an example of this pattern for the last 20 years that was not bullish.
Does lower trending inflation or a neat looking pattern on a stock chart mean that the rest of 2023 will be a straight line up for equities? No. And while as we discussed last week, volatility markets argue for a strong May and early June, which is ln line with our first half 2023 forecast, they also portend a very normal summer sell-off.
Viewers, when the economists and strategists on TV start talking uniformly about recessions or chronic inflation, try as much as you can to walk away and take a deep breath. The consensus is almost never correct. And when it comes to asset allocation changes, most of the time, the best action is no action as this allocation was presumably set with a multiyear time horizon. The best time to make changes to your asset allocation is when your emotions are low and market volatility is low as well.
Viewers, there is no perfect investment philosophy, there is no perfect trading tool, that is all weather, outperforming every stock cycle or in every economic environment.
At Oak Harvest, we have many tools that our advisors use to help our clients meet their retirement goals and objectives. These tools are both market based and insurance based, that we can use to meet your retirement goals. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 or click here to schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.