What I Care About This Week | 2022 Aug 15

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by Franklin J. Parker, CFA

The Summary

  • 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.

The Details

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.

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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