Negativity Everywhere, Even After a Summer Rally
There is a tremendous amount of negativity in the media, and we must admit that we have been in the same camp as many of these folks during 2022.
On August 18, The Conference Board published its Leading Economic Index numbers for July. For the fifth straight month, the index declined. The Board projects the economy won’t expand in the third quarter, and we could see a short but mild recession by early next year.
According to The Board, “Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy.”
Similarly, Barron’s August 22 cover story — “Sorry… We’re In a Recession” — discussed how small businesses and households are straining.
However, we maintain that many of the businesses that we chat with aren’t doing all that bad. In fact, many of them are still experiencing growth, albeit much slower growth. We don’t hear anything, even anecdotally, about “business falling off of a cliff.”
Federal Reserve Chairman Jerome Powell said that he expects the Fed to continue raising interest rates and hold them at a higher level until inflation is under control. We believe the Fed may go too far for too long in the end, and that will impact economic activity very negatively.
This time period reminds me a bit of 2000. After a roaring period in the late 1990s, the economy had tremendous excess. That excess quickly came out of the market when we saw the “Dotcom” bubble pop. That has largely occurred in the Nasdaq the past 12 months or so, though we likely have a bit more excess to bleed off. We would continue to avoid any growth sectors for a bit longer. After 2000, several “value” sectors outperformed, such as energy, consumer staples, and materials. We still believe that major rotation is continuing to occur, and we continue to favor value and dividends over growth.
As we have stated throughout this year, to endure through this recession, we would take a few of these steps:
Hold a below-normal allocation to stocks.
Make sure stocks that you own are value-oriented and dividend-paying.
Investment grade corporate bonds approximately 2 years to maturity are paying around 3.25% to 4%, and we would buy those rather than hold any excess cash.
In managed accounts, we expect to be more active than usual, taking a bit off of the table after rallies and adding in technical levels of support.
Please call 918-984-9102 if you have any questions or concerns.
Nate Lovelle, CFA
NLovelle@counciloakwealth.com
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