What’s in store for Q4
I hope you and your families are doing well and looking forward to the holidays ahead!
It is my wife’s favorite time of year so it is only a matter of time until our home smells like wonderful food and baked goods.
I honestly cannot wait.
Before I get to the financial stuff, I wanted to share a brief story with everyone (bear with me, I promise it will all tie in).
Some of my clients may know this; however, others may not. But I wanted to share a snippet of my childhood to reiterate why I do what I do, and why I love it.
As a young child, you could say my life was tumultuous. My sister and I lived in a musical chairs of homes. Hotels, friends’ homes, and an array of family members’ homes. But that didn’t stick with me as much as when we lived in a car for a few years.
Eventually one evening, things got so bad that my mother dropped my sister and I off at the sheriff’s station. From there, my sister and I were separated and put into emergency foster care.
I was 6 at the time and that was the last time we saw her.
I tell you this because as you may imagine, it has left me feeling a little uncertain and I have danced with it my entire life. It is precisely why I thrive as a trusted family wealth advisor.
I pride myself in learning your family’s story and values to carefully hedge against whatever comes our way.
Every year, speaking as an investor, the only thing I am certain of is uncertainty.
This year is no different. Uncertainty is ramping up. Most notably, expanding geopolitical tensions and US election rhetoric, extreme market valuations, and unsustainable national debt.
Geopolitical Tensions
I see this as one of the biggest catalysts for market at winds at the moment.
The recent attack on Israel by Iran has caused the US powers, although supportive of Israel, to be unsupportive of an attack on Iran’s nuclear facilities.
I pontificate, as well as many others across the globe (Iran as well), would be a significant escalation.
In response to the potential for an expanding war, oil has rallied over the last few days preceding the attack (see chart below). Which, being a component used to calculate inflation may bring unwanted repercussions.
To be fair, at this point, the recent rally is fairly contained. Nothing in the M
medium-term chart has given definitive evidence that this rally will lead to a shift in trend (see chart below).
Yet given the large moves recently we need to pay close attention to oil. If oil rises at an unsustainable rate downward pressure on equities markets and upward pressure on inflation may be apart of our future reality.
Economic Dashboard
Currently, the US economy is in a relatively strong position. Although, some cracks have been seen in the labor markets (which we spoke about in the last Outlook) and manufacturing.
The recent ISM data for September stated that “Economic activity in the manufacturing sector contracted in September for the sixth consecutive month and the 22nd time in the last 23 months” (chart on next page).
For those of us who do not know, manufacturing contributed 2.9 trillion dollars to US GDP. Which makes up roughly 11% of the GDP calculation.
Of course, the majority of GDP in the US is calculated from services or consumption based industries; however, the contraction in manufacturing is nothing to scoff at.
Manufacturing is a source used to assess employment, innovation, and trade. A continued decline in manufacturing is not seen as a good thing.
If you read the last market outlook I produced, I made the assumption that it is possible the US economy still heads into a recession, as history shows what happens when the yeild curve un-inverts. (read here if you missed it)
Which, moving forward, is why I will reinstitute my economic dashboard (see below).
If you have been a client for some time you may remember I used to produce this when I was at my previous firm.
I believe that you and I will get more clarity out of seeing how everything progresses over time (see below).
In addition, the leading economic index (LEI) faltered in August.
After an initial slide through, 2022 data seemed to be improving. However, as of August LEI data has slipped lowering the 6 month growth rate signaling potential recession.
Earlier this month, economists touted that the “left tail” (market decline/hard landing) risk has been eliminated due to the federal reserves’ action in lowering rates by .50% last month.
In my last outlook, I argued that this may not be the case.
Please excuse my skepticism, but there is still a lot that needs to go right for a “soft landing” to take place.
Uncertainties rising may make it difficult for the Fed to control what does or does not happen.
Current Market Strength
As of this writing, despite the economic cracks and geopolitical woes, the capital markets have held up well, generally speaking.
From a broad perspective, the S&P 500 is still in an up-trend and there have not been any major technical signal breakdowns as of yet (see below).
In addition, the Nasdaq, although trading mostly sideways for the last few months, has not shown any major technical indications of a break in long-term trend either.
Conclusion
As you can see, there is quite a bit of uncertainty facing the US and world economies at the moment, all of which potentially make a “soft landing” scenario more difficult.
Much of the optimism in AI, slower inflation, and the Fed’s stance on rates can easily be overshadowed by any number of headwinds we do not control.
Many investors and market strategists believe we are still in a secular bull market (bull markets lasting 13-20 years - see below). Including myself. Based on the averages it is not out of the scope for this bull market to continue into the late 2020’s to the early 2030’s; However, swift drawdowns still come in secular bull markets and we need to be aware of potential headwinds. Making adjustments as we go can make the difference between a successful and unsuccessful long-term investment strategy.
As we continue to assess developments I will continue to update you in all that I see and the changes we make. At this time we are still fully invested and will continue to be unless big changes are merited.
As uncertainty rises, let’s dance with it.
Thank you for reading,
James Anadon
Economic Dashboard - INFO
Yield Curve - A steeper Yield Curve shows that bond investor sentiment is more optimistic about economic activity moving into the future. If the 10 Year treasury minus the 3 Month Treasury provides a positive slope of + 0.25 or Higher it is considered expansionary, + 0.25 to 0.00 is considered cautionary, and anything under 0.00 slope is considered Recessionary Source: Federal Reserve
Credit Spread Credit spreads refer to the difference between higher quality us treasury and less than investment grade quality (Junk) debt of the same maturity. A sudden widening of the difference in yield (spread) indicates growing concern about the ability of corporate (and other private) borrowers to service their debt. Narrowing credit spreads indicate improving private creditworthiness. Source: ICE BofAML US Corporate BBB Option-Adjusted Spread / Federal Reserve
Money Supply - When economic growth slows the federal reserve will help influence the increase in the money supply. This is a sign that growth has slowed. When the economy get overheated (too much growth) the Federal Reserve will influence the money supply by helping to reduce the money supply. Sources: BLS, Board of Governors
Wage Growth - Wage growth is one of the main indications to measure economic growth for the long-term since it reflects the consumer's purchasing power in the economy. However, wages growing too fast may cause to quick an increase in inflation. Wages growing to slow make it difficult for an economy to grow. Growth under 3.5% Y/Y is considered not optimal Source: BEA
Producer Prices - In the United States, the Producer Price Index for final demand measures price change for commodities sold for personal consumption, capital investment, government, and export. It is composed of six main price indexes: final demand goods (33 percent of the total weight), which includes food and energy; final demand trade services (20 percent); final demand transportation and warehousing services (4 percent); final demand services less trade, transportation, and warehousing (41 percent); final demand construction (2 percent); and overall final demand. Source: Bloomberg
Housing Permits - Building Permits refer to the approvals given by a local jurisdictions before the construction of a new or existing building can legally occur. Not all areas of the United States require a permit for construction. Source: US Census Bureau
Jobless Claims - Initial jobless claims have a big impact in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, Initial jobless claims measures new and emerging unemployment. A multi-Quarter increase of Jobless claims can be seen as recessionary. Source: US Department of Labor
Retail Sales - Retail sales report in the US provides aggregated measure of sales of retail goods and services over a period of a month. There are thirteen major types of retailers: Motor vehicle & parts dealers, Food & beverage stores, General merchandise stores , Food services & drinking places, Gasoline stations, Nonstore retailers, Building material & garden dealers, Health & personal care stores, Clothing & clothing accessories stores, Miscellaneous store retailers, Furniture stores, Electronics & appliance stores and Sporting goods, hobby, book & music stores. Source: US Census Bureau
Job Sentiment - When individuals have an optimistic outlook on the job market, they are more inclined to spend. When they are worried about the prospects of the job market they may be more likely to cut expenditures. Source: Conference Board
ISM New Orders - The ISM index is a good leading indicator of the economy and is useful in gauging turning points in the business cycle. A headline number above 50 is consistent with both manufacturing and economic expansion. An index below 43 for an extended period is consistent with an economy in recession. Our report allows for a recession to be called after 2 consecutive quarters of decline. Source: ISM
Profit Margins - Profit margins contract if profits fall faster than costs can be cut. Declining profit margins are a warning sign of economic activity and in subsequent warning of recession. Slowing profit margins for multiple quarters is considered recessionary. Source: BEA
Truck Shipments - 70% of all freight in the US is moved by Truck. If the indication is that fewer products are shipping (Represented in a decrease in tons shipped) for an extended period of time at increasing amounts it is considered recessionary. Source ATA
References: