by Franklin J. Parker, CFA
- Last week, inflation posted lower than expected and came off of its previous highs. Both consumer prices (which is what you hear about in the news) and producer prices (which is what the Fed watches more closely) abated a little in June. That said, consumer prices still rose 8.5% year-over-year, which is still very high, and the Fed has so far kept their guidance for aggressive rate hikes.
- This week, investors will get a sense of the health of US consumers with retail sales data posting on Wednesday. In that theme, Walmart and Target report earnings this week, and investors are very likely to see these two as a bellwether. Some information on manufacturing hits as well with industrial production and the NY Fed’s Manufacturing index.
- Overall, investors appear to be pricing away the Fed a bit faster than may be warranted. On the upside, companies have grown earnings and the US consumer remains strong. If those two factors begin to falter, investors may do well to adopt a more defensive posture.
What is risk?
In the traditional economic sense, risk is the volatility of your portfolio. A more extreme rollercoaster is generally less preferred than a less extreme rollercoaster. In this context, diversified portfolios, held forever, are preferable to non-diversified portfolios with limited holding periods.
A new line of thinking is emerging, however. Risk, at least to me, is the probability that you fail to achieve your goals. Most of the time that means trying to lower the volatility of a portfolio, but not always. There are some circumstances when concentrated and very volatile positions are appropriate.
Also in this context, the timing of market drops matters because goals usually have a limited time horizon. A 2008 in your portfolio is considerably worse right before you retire than it is when you are 20 years from retirement.
Ultimately, this means that we must view potential market moves and investment selection through the lens of the goals you are trying to achieve. That is why financial planning is so important. We have to understand you and your objectives just as well as we have to understand the wider world of investment opportunities.
Chart of the Week
Another recession indicator that I follow is the Conference Board’s Index of Leading Economic Indicators. It is a quick summary of many different economic indicators (the S&P 500 index is one of them).
This index has been on the decline recently, which is usually a recessionary signal. However, as past recessions have shown us, there can be quite a time gap between when the index peaks and when the recession actually hits. Taking the COVID recession out of the data puts the average time around 16 months. With the recent peak in February of 2022, based on this index alone, we might expect a recession sometime in June of 2023.
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