One of the frustrating things about investing is that the data can tell you one thing while the market does the complete opposite. The markets can lag the data by months or even years. Other times they seem to be ahead of the data. Today we’re on the verge of recession, but we might also be in the middle of a pretty strong economy. The S&P 500 has had a great start to the year, but only due to a handful of stocks. How do we make sense of an environment where the numbers are pointing in different directions?
“There’s no doubt that a recession is on the horizon.” This is one of the lowest-information statements experts say. It’s like saying they’re cautious on the markets. Is there a time to be reckless on the markets? Unless the economy is actively in recession, of course there’s another recession coming up. But it sounds ominous and makes the speaker seem brave and intelligent even though they’re really a stopped clock. Keep saying that a recession is coming and you’ll be right… eventually.
I poke at the soundbyte media culture, but there is a case to be made that we are close (within 12 months) to recession. Recessions are often brought about by monetary policy mistakes. Like individual investors, the more the Federal Reserve fiddles with the economy, the more likely they are to make a mistake. They’ve done plenty of fiddling between not hiking when inflation started, playing catch up once inflation took hold, and scrambling to react to the latest banking issues. It’s said the Fed moves rates until something breaks. Are 5 bank failures a sign that something broke?
On the other hand, it seems that everyone expects a recession later this year. If everyone expects and prepares for a recession, does that nullify the prophecy? Recessions are often spurred by some economic shock. Have we really seen that yet? Unemployment is stubbornly low. Although still high, inflation is receding. Maybe there will be a series of rolling recessions hitting individual sectors one at a time (tech last year, corporate real estate this year, etc), but the overall economy will miss technical recession and muddle through with low, but not negative growth.
The S&P 500 has gained 9.2% year-to-date. This is great news, but we are still in a bear market. One concern is the narrow breadth of this rally. 9 stocks are responsible for 9.3% of the S&P’s return this year. This doesn’t mean stocks are weak. The MSCI EAFE is up 11.5% year-to-date. It would take over 100 of that index’s top performers to make up 9.3% of its return – a much broader sample.
The data today is a Rorschach test. You can make it say whatever you want and you don’t even need to torture it. What should investors keep in mind?
Zoom out. Look at the portfolio as a whole.
We don’t know what’s next for the economy (no one does), and the exact timing, depth, and market impact is impossible to predict. Even if we could predict a recession, there is no way of knowing the “best” way to navigate it. The “best” asset class rotates, often irrationally. A diversified portfolio turns this into a decision we do not have to make. Rebalancing a diversified portfolio forces investors to buy low and sell high. Keeping an eye on taxes keeps more money in your pocket. At the same time we are watching for opportunities.
Last but not least, congratulations to Chris Martin for earning a promotion to partner. Chris stands out for his experience in managing concentrated stock positions and thoughtful planning around stock option plans. He takes great care in the generational planning that is top of mind for many of his clients. He has also been a leader in innovation and cybersecurity for Fairway. Well done, Chris.