by Franklin J. Parker, CFA
The Summary
- The Bottom Line. Last week’s GDP print was encouraging, and may have struck the right balance: economic growth, but with flagging consumer and business spending. The Fed meets this week, and all ears are listening for whether they plan to adjust the path of interest rate hikes. If we get some dovish commentary (which is my expectation), we could then expect to see a market rally. Overall, my view is cautious, but not pessimistic. There are some buying opportunities in this market, in my view, but consumer spending will be a key variable to watch.
- In addition to being Fed week, investors get lots of data. We see data on manufacturing, job openings, the unemployment rate, productivity, and consumer credit. Any of this data could move markets, but it will be the Fed meeting that will dominate both the news and market gyrations.
- Grains and foodstuffs are back in the news as Russia has pulled out of a pact to continue grain exports citing danger to merchant shipping. This in addition to rising energy prices, globally. In addition to the humanitarian concerns, food and energy are basic inputs into economies. With higher energy and food costs, economic growth is expected to slow in addition to the upward pressure this puts on already-high inflation figures.
The Details
This week we’re going to discuss a pet peeve of mine.
It is not uncommon to see charts like the one below both online and in presentations. The narrative usually runs something like this: markets have grown exponentially, and, over time, long-term investors are rewarded by simply staying invested. So, the conclusion runs, you should just stay invested!
What irks me about this narrative is that it is both true and not true.
It is true in the factual sense: yes, over a 60-year period, markets have tended to deliver exponential returns (see chart below), and there is a reasonable basis to believe the next 60-years will look similarly.
It is untrue in the sense that almost no one has a 60-year time horizon!
Real people who have real goals to achieve will become short-term investors at some point, which, unfortunately, makes all of us market timers. It is not enough to simply say “don’t worry, it’ll come back!” Of course markets will come back, but that isn’t the relevant concern. Whether markets recover in time for you to accomplish your goals is the relevant concern.
Proper investment and risk management must begin with an understanding of your goals. For some objectives, you may have a 30-year time horizon, while you may have a 3-year time horizon for others. Managing risk looks entirely different in each of those accounts.
Chart of the Week
Last week’s GDP release was both encouraging and discouraging.
Headline GDP growth was better than expected at 2.6%. However, private investment continued to contract and consumer spending, though still positive, was less than expected. In short, exports boosted GDP growth much more than normal, but that is unlikely to continue much longer.
The key variables to watch, in my view, are consumer spending (personal consumption, in the chart below) and private investment. If we see both of those turning negative, a recession is likely not far behind.
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