Of Hurricanes and History - Important Market Lessons
Of Hurricanes and History - Important Market Lessons
This week Jake discusses some of the opportunities that can be missed when trying to time the markets and reiterates the need for keeping a cool head and remaining invested during stormy seas.
Five Things You Should Know
- Equity Markets – were lower this week with U.S. stocks (S&P 500) down -5.05% while international stocks (EAFE) fell -5.13%.
- Fixed Income Markets – were lower with investment grade bonds (AGG) down -1.51% while high yield bonds (JNK) fell -4.56%.
- No Inflation Relief Yet – Inflation metrics hit a new 40-year high in May with consumer prices surging 8.6% year-over-year. The monthly jump of 1% was even more surprising, with increasing gas prices to blame for the bulk of the spike. Polled Americans now view inflation as the nation’s top problem and are beginning to grow frustrated with both the Federal Reserve and the current government’s inability to curb costs.
- ECB Confirms Rate Hike – Meanwhile across the Atlantic the European Union confirmed this week their plans to raise interest rates by 25 basis points in July, with a further hike expected in September. Europe has also been no stranger to inflationary concerns with the most recent year-over-year metric coming in at +8.1%. Policy makers have been struggling to find a balance between combating inflation without compounding the economic slowdown because of the ongoing Ukraine/Russia conflict.
- Key Insight – [VIDEO] This week Jake discusses some of the opportunities that can be missed when trying to time the markets and reiterates the need for keeping a cool head and remaining invested during stormy seas. [ARTICLE] JPMorgan CEO Jamie Dimon sees a “hurricane” on the horizon. Is he right? And more importantly, does it even matter to markets? What history tells us about the answer will likely surprise you.
Insights for Investors
Real Financial Professionals are not defenders of outdated maps. They're guides in a changing landscape. – Carl Richards
Intro
Markets like this are tough and test any investor’s patience. They are also an inevitable part of the experience of investing and making money over time. The urge to “make the pain stop” can be very strong, but so too does your memory around prior times that likely tested your resolve. I’ve talked to numerous people (not clients) that have expressed their remorse at having bailed out during the COVID crash of 2020. Even as I write this after the current decline, the S&P 500 is still over 70% higher than the lows of 2020!!
You don’t get those types of gains unless you can tune out the noise and keep your focus on your goals and the markets history of resiliency instead of your worst fears. To think otherwise, regardless of what you try to call it, is to believe you can time market movements.
Speaking about tuning out the noise…
Is a Hurricane on the Horizon?
We’ve discussed in the past about being “very careful” trying to trade headline news. Jamie Dimon, CEO of JP Morgan, made waves last week talking about the “hurricane” he is expecting. The danger here, like trading off of most soundbites, is they don’t address the important distinctions and nuances around timeframes or how markets and economies actually interact. Of course, trying to explain all of that wasn’t Dimon’s intention with his comments, even if many in the press have tried to frame it that way.
Michael Cembalest, of JPMorgan himself, addressed Dimon’s talk and these very issues in JPMorgan’s market insights this week (click here if interested).
In particular, he discussed the stock market’s counterintuitive pattern of bottoming long before economic data does stating, “In every business cycle downturn, equity markets lead the economy by several months if not longer. In other words, equity markets anticipate the kind of economic hurricanes that Jamie expects … In each [of the prior six major post-war business cycle downturns], equity markets declined, the economic hurricane worsened a few months later and equity markets bottomed while the economy was still getting worse. That’s what appears to be happening this time as well, at least so far.”
Others, including JPMorgan Chief Economist Bruce Kasman, disagree with the hurricane outlook all together. Kasman stated this week, he sees “no real reason to be worried about a recession,” arguing economic growth will continue in the months ahead – albeit at a slower pace due to high inflation that has rattled businesses and households. “I think what we’re going to see is growth continue to be on the softer side, but growth continue to show resilience,” Kasman told Bloomberg.
Brian Wesbury of First Trust, in an article we’ve included below, echoed sentiments similar to Kasman and also concluded it was premature to hit the panic button over economic concerns.
The Sun Through the Storm
Sure, times are tough right now, but this is also why the stock market is already down almost 20%. The key moving forward is to take the time to evaluate current market expectations and opportunities.
As famed market commentator Jeremy Siegel stated today, the market has likely already priced in a recession or at least the expectation of one. As an investor it is the reality of the markets expectation of recession that matters far more than whether one actually materializes given today’s market levels and sentiment.
Furthermore, Siegel noted that a deeper look at the S&P 500, sans tech names, shows an average P/E of just 13x – a level that hasn’t been seen since interest rates were considerably higher and the foundation of a good long-term opportunity/outlook for investors.
But what about today’s horrible inflation report? Similar to the scenarios above, markets are likely to turn before reports improve. Goldman Sachs highlighted this with their comments this week stating that, “As sources of US inflation have continued to be broad-based, equity returns have remained challenged. Historically, the equity market has fallen 2% on average in the 6-month run up to an inflation peak. However, in the subsequent 12 months after a peak, we've observed strong equity market returns averaging 10%, even if a recession ensued. We believe equity markets may be well positioned for a recovery should inflation normalize.” (see chart below).
In Closing
As the saying goes, “it’s darkest before the dawn” and sentiment and expectations continue to be very “dark.”
Hard as it is to believe at times, it is this very bleakness that provides the foundation to a market’s turnaround.
It’s normal to be scared, it’s natural to worry, it’s also true that for those of you with the right plan and portfolio, it’s perfectly okay to let go of those concerns and know your financial “boat” was built to withstands such storms.
As always, we are here for you and committed to getting you through such times.
Have a wonderful weekend,
Tim and the team at TEN Capital
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No Hurricane, Yet
To view this article, Click Here.
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/6/2022
JP Morgan CEO Jamie Dimon caused a stir lately when he talked about a "hurricane" hitting the US economy. We think he may eventually be right, but is way too early. The employment report for May confirmed that the US economy continues to grow.
Both major measures of jobs went up in May: nonfarm payrolls rose 390,000, while civilian employment increased 321,000. Total hours worked expanded 0.3%. Has a recession already started? Certainly not.
Notably, there is some evidence of a transition in the economy away from goods and toward services. Retail payrolls are still up from where they were pre-COVID, but dropped 61,000 in May. With the exception of the initial onset of COVID-related lockdowns in 2020, that's the steepest drop for any month since 2009. Meanwhile, jobs in leisure & hospitality increased 84,000, the seventeenth consecutive monthly gain.
In turn, this fits with recent activity on the stock market, where companies that specialize in retail goods have suffered relative to those, like theaters and airlines, which provide services. More people want to be out and about, getting back toward normal.
The worst part of the jobs report was for wages, where average hourly earnings rose 0.3%. In a normal economy, a 0.3% gain would be perfectly fine. But with consumer prices up an estimated 0.7% in May, that's no bueno for workers.
The funny part is that some politicians are now trying to take credit for the job growth. The President says he's created about 600,000 "new" manufacturing jobs, for example. It's true that is (nearly) how much manufacturing jobs are up since January 2021, but total manufacturing jobs are still 17,000 below the pre-COVID peak. Politicians want to take credit for good news and blame others for bad news. We are forced to take data at face value with no political point of view. The economy is still climbing out of the COVID lockdown hole. That means jobs will grow in 2022 in spite of the Fed raising rates.
In spite of this problem, consumer cash flow and balance sheets remain healthy. The financial obligations ratio finished 2021 at 14.0%. That's the share of consumers' after-tax incomes that they need to use on debt obligations (like mortgage payments and car loans) as well as recurring payments such as property taxes, homeowners' insurance, and car lease payments. To put that in perspective, from 1980 (when the data start) to the end of 2019, the ratio was never lower than 14.7%.
Meanwhile, household net worth finished last year at more than eight times annual after-tax income, the highest ratio on record. Americans had $1.2 trillion in checkable deposits and currency before COVID. At year end 2021 they had $4.1 trillion.
The bottom line is that loose money from the Federal Reserve has inflated everything. Moreover, monetary policy remains loose and the lag between loose money and the economy is long and variable. Put it all together and it means some sort of hurricane is on the radar, but it isn't very close.
Data, Just the Data
Data points this week included:
- U.S. Jobless Claims – rose for the first time in 3 weeks, up 27K and reached 229K for the week ending June 4th. This marks the most claimants since January, but still remain in the 200K-250K range which marks healthy labor conditions. The four-week moving average increased to 215K.
- U.S. CPI – the annual inflation rate reached 8.6% in an unexpected jump for the month of May. Signs of decline have now abated, as this is the highest inflation rate since 1980 thanks to surging energy prices, up 34.6% (the highest since 2005) and rising cost of food, up 10.1%. Conversely, core inflation moved lower to 6%.
- U.S. Balance of Trade – the trade deficit moved to a four-month low of ($87.1B) in April – a stark contrast from the record ($107.7B) in March. Exports rose 3.5% to a new high of $252.6B, thanks to natural gas, while imports decline (3.4%) to $339.7B. Our deficit with China moved lower by ($8.5B) as imports fell the most in seven-years.
- U.K. PMI Composite – the S&P Global composite finished at 53.1 for May, after a forecast of 51.8 and far below the 58.2 reading from April. Manufacturing and services saw dips to 54.6 and 53.4, respectively. Private sector firms showed a contraction in growth of business and new orders. Price inflation on both the producer and consumer fronts put pressure on businesses. Business confidence fell to a 17-month low.
- Eurozone ECB – the Central Bank disclosed they will be ending their ‘net asset purchases’ and raise interest rates by .25%, marking the first rate raise in 10 years. They have also put another increase on the horizon in September. The ECB inflation projected have been revised to 6.8% end of year and the growth outlook was lowered to 2.8%.