If it walks like a duck... David Alan Carter
We all know the duck test. There are variations, but it typically goes something like this: If it walks like a duck, quacks like a duck, and swims like a duck, then it’s probably a duck.
So, if it walks like a recession, quacks like a recession, etc., is it a recession? Well maybe, maybe not.
We all know the duck test. There are variations, but it typically goes something like this: If it walks like a duck, quacks like a duck, and swims like a duck, then it’s probably a duck.
So, if it walks like a recession, quacks like a recession, etc., is it a recession? Well maybe, maybe not.
The latest gross domestic product (GDP) numbers suggest the economy shrank in each of the past two quarters. By some rule-of-thumb definitions, classic recession. Most economists, however, don’t like the “two-quarters” definition. They consider it too narrow because it is based on a single economic indicator. Any one indicator, even GDP, can sometimes be misleading.
"I do not think the U.S. is currently in a recession," Fed Chair Powell told reporters after the end of the U.S. central bank's latest policy meeting, citing an unemployment rate that is still near a half-century low and solid wage growth and job gains.
While all this recession parsing is high drama for economists and analysts, for most Americans it boils down to the following: is life on Main Street likely to get worse in coming months or will the situation stabilize and possibly even improve?
And for investors, the following: how will the coming months, recession or not, be reflected in the stock market? Because here’s the deal: the stock market is not the economy. The two do not necessarily march hand in hand.
Consider the past few weeks. Since mid June, the stock market is up 11%. This, in the face of growing recession fears. True, the market’s got a long way to go to climb out of hole it dug for itself in the first half of the year. And this particular surge could be just a bear-market bounce.
But There Are Reasons To Be Optimistic
The Party Crashers
In the interest of balance, other market movers and shakers are not quite so positive.
So there you go.
And For What It’s Worth…
The bidding started at $25,000 on eBay. And one anonymous bidder went on to defeat 43 others to secure a private steak lunch with investor Warren Buffett at the Smith & Wollensky Steakhouse in New York City. The winning bid: $19 million. This will be the last such “power lunch” with Buffett, age 91, which first began back in 2000 and has raised over $53 million for charity. Buffett tells guests that all subject matter is fair game during the meal – aside from his future investing strategies.
What’s on the menu? Buffett orders steak, says restaurant owner Alan Stillman. “But always with a Diet Coke.”
"I do not think the U.S. is currently in a recession," Fed Chair Powell told reporters after the end of the U.S. central bank's latest policy meeting, citing an unemployment rate that is still near a half-century low and solid wage growth and job gains.
While all this recession parsing is high drama for economists and analysts, for most Americans it boils down to the following: is life on Main Street likely to get worse in coming months or will the situation stabilize and possibly even improve?
And for investors, the following: how will the coming months, recession or not, be reflected in the stock market? Because here’s the deal: the stock market is not the economy. The two do not necessarily march hand in hand.
Consider the past few weeks. Since mid June, the stock market is up 11%. This, in the face of growing recession fears. True, the market’s got a long way to go to climb out of hole it dug for itself in the first half of the year. And this particular surge could be just a bear-market bounce.
But There Are Reasons To Be Optimistic
- While overall inflation numbers roared to a fresh 4-decade high in June, some numbers are starting to inch down. Shipping prices are falling. Prices for some key commodities and raw materials (i.e. corn, wheat, lumber, cotton and more) are falling. And after surpassing $5 a gallon in June, the national average for gasoline has fallen for more than a month – now averaging $4.35/gallon.
- Quarterly earnings in general have been coming in stronger than expected, albeit with a few notable misses along the way. “The fact that earnings are not as bad as feared is a very constructive thing for the markets,” said Anastasia Amoroso, chief investment strategist at iCapital. “The fact that we have priced in a whole lot of slowdown already, that too has just de-risked the landscape.”
- Fundstrat’s Tom Lee tells CNBC the 2022 bear market is over, and that stocks could hit new highs by the end of the year.
The Party Crashers
In the interest of balance, other market movers and shakers are not quite so positive.
- Jeremy Grantham, cofounder of investment firm GMO, has taken quite the opposite view: “It’s likely that there will be considerably more pain before this is finished,” he said in a recent interview with the Associated Press.
- “This is a rally within a bear market rather than the start of a new bull market,” said David Donabedian, chief investment officer of CIBC Private Wealth US.
So there you go.
And For What It’s Worth…
The bidding started at $25,000 on eBay. And one anonymous bidder went on to defeat 43 others to secure a private steak lunch with investor Warren Buffett at the Smith & Wollensky Steakhouse in New York City. The winning bid: $19 million. This will be the last such “power lunch” with Buffett, age 91, which first began back in 2000 and has raised over $53 million for charity. Buffett tells guests that all subject matter is fair game during the meal – aside from his future investing strategies.
What’s on the menu? Buffett orders steak, says restaurant owner Alan Stillman. “But always with a Diet Coke.”
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection** remains paramount.
Best always,
David
________
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Best always,
David
________
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
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