What I Care About This Week | 2022 May 31

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Photo by Akil Mazumder on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • This week gives us some insights on the financial health of US families. Today we see figures for home prices, tomorrow we see the number of job openings (11.4 million openings are expected), weekly initial jobless claims post on Thursday, and on Friday we see average earnings and the headline unemployment number, which is expected to tick slightly down to 3.5%. All in all, this is an important week for data.

  • Last week’s rally brought US stocks higher, led by downtrodden tech shares. The rally was positive from a technical perspective, showing strength after several weeks of weakness. However, volume has been lower indicating there may not be as much momentum behind the move as there otherwise would be.

  • Given that I see a low probability of recession this year, it is my view that markets have either bottomed or are very close to doing so. Stocks rallied strongly after touching the 20% down mark. Whether or not those buyers stick around is an open question, of course, but downswings in excess of 20% outside of recessions are very rare, historically. That said, if the S&P 500 starts to break below the 3800 level, prices may struggle to find support. As I have said for a while now, flexibility and adaptability are key in this environment.

The Details

Imagine for a minute that you are in an airplane when the engine catches fire. The panic is palpable. The feeling of helplessness, the angst over your immediate future…

While I am not a pilot, I have always imagined that the pilot must have the same panic as everyone else on the airplane in that scenario. The pilot, however, has one distinct advantage over the passengers: she has a checklist to run in that kind of emergency. While she may feel the angst, she does not let it drive her decision-making. Rather, she turns to a pre-thought-out series of steps that will ensure the situation ends as well as it can given that an engine is on fire.

Which illustrates the importance of a cohesive investment strategy, and the discipline to follow it. A cohesive strategy is that checklist that tells you what to do in any market scenario. Just like the pilot, we might feel considerable angst, but we must keep ourselves disciplined to follow the pre-thought-out series of steps that will ensure the best outcome, given the market scenario.

Without that checklist, that cohesive strategy, we are left to cast about wondering what to do, listening to any and all thoughts on the matter. Can you imagine our pilot having the passengers debate how to handle an engine fire!?

I find it helpful, from time to time, to remind ourselves of the basics. A cohesive investment strategy must be a central feature to any interaction with markets. Without it, we are left to cast about during the inevitable times of market turbulence. And that kind of behavior can quickly threaten our future goals!

Chart of the Week

Valuations, at least as measured by price-to-earnings ratios, have come down quite a bit over the past six months or so. This has been a global trend in keeping with the coordination of central banks to tighten the money supply, as this week’s chart demonstrates. US markets still command a premium, though even that premium has contracted a bit. A return to pre-2015 valuations would be a welcome sight for investors struggling to deploy cash at valuations sitting around multi-decade highs.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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