No Landing??
There has been much talk lately about the possibility of the economy not having a hard recessionary landing or even a soft landing. The new label is “no landing,” implying that the economy never enters a full-on recession and continues to grow instead. The belief is that this will force the Fed to continue raising interest rates since inflation would remain high.
These three completely different economic predictions — soft, hard, or no landing — don’t help the average investor, as the talking heads seem to say, “The economy could go up, sideways, or down.” Thanks for the great analysis, people!
Inflation remains the top priority of the Fed, up 6.4% in January. The largest impacts were energy costs, up 8.7%; food costs, up 10.1%; and shelter costs, up 7.9%. Dallas Fed President Lorie K. Logan said the Fed might need to take rates higher than expected. The concern seems to be that service inflation remains high even after removing shelter costs. Even though energy should be coming down in the next couple of reports, prices in many other areas remain high.
So, if we have a “no landing” and inflation remains, the Fed may continue raising rates, and the market will adjust accordingly — most likely a negative consequence for growth stocks and technology.
So far this earnings season, 82% of S&P 500 companies have reported results. According to FactSet’s “Earnings Insight” on February 17, the blended earnings decline for the S&P 500 is −4.7% for the fourth quarter of 2022 versus the previous year. If this continues, it will mark the first time we have seen a year-over-year decline in earnings since 2020 (COVID). The culprit is profit margin, meaning that expenses are increasing at a higher rate than sales. The companies that have issued negative earnings guidance for 2023 outnumber those with positive guidance 3 to 1.
We still suggest that our clients hold a below-normal allocation to stocks. We believe Fed rate increases and inflationary pressures will continue negatively impacting corporate earnings and profit margins.
Within stocks, we believe you must focus on the consumer through energy, healthcare, and staples companies that pay above-average dividends. Also, most international stock indices continue to outperform their U.S. counterparts in 2023, and we prefer an above-normal allocation there.
Lastly, with the most recent uptick in interest rates, we can now build a very high-quality bond ladder out to five years made up of U.S. Treasuries, CDs, and corporate bonds that average over a 5% yield. So there is a decent alternative if you want to be more conservative, albeit an alternative that may not beat inflation.
As usual, please call or email me with any questions.
Nate Lovelle, CFA
Director – Portfolio Management
Council Oak Wealth Advisors
918-984-9102 Direct
918-779-4022 Fax
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional adviser should be consulted before implementing any of the strategies or options presented.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), or product made reference to directly or indirectly on this website, or indirectly via hyperlink to any unaffiliated third-party website, will be profitable or equal to past performance levels. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. There are no assurances that a client’s portfolio will match or outperform any specific benchmark. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.