by Franklin J. Parker, CFA
- The Bottom Line. My outlook on the US economy has shifted significantly over the past couple of weeks. A recession, while not imminent, does appear to be forming. Of course, pre-recessionary markets can still deliver solid returns, but I am watching the fundamental economic data closely, and this week we get a lot of it!
- We get several important data points this week. Consumer confidence, job openings, headline unemployment, personal consumption expenditures, factory orders, and PMI all post this week. I am watching very closely for signs of a recession. An uptick in headline unemployment and a downtick in PMI and factory orders would confirm my suspicions that the economy is weakening, but we need to wait and see what the data says.
- Protests in China’s largest manufacturing hubs have sparked concerns among investors that supply chains may again be disrupted. Speaking of supply chains, there is growing worry that the largest railroad unions will strike, and the union representing all dockworkers on the west coast has yet to agree to a contract with ports. All three of these represent critical infrastructure for the movement of goods, and a failure at any point would significantly slow an already-sputtering US economy.
It is no secret that recessions cause damage to investment portfolios. There are, however, several considerations investors should keep in mind.
First, markets tend to price about six months ahead of the news. So, the drawdown in markets tends to begin around six months before the recession begins, and the recovery begins six months before the end of the recession. Understanding when a recession might begin or end is a critical component to managing risk.
Second, your goals—not just the overall market environment—should inform the risks you can take in your portfolio. There are drawdowns, for example, which are too great to recover from, and understanding the limits of your portfolio is a critical element to managing your risk (a topic I address in my latest book).
Finally, recessions do not treat all investment types equally. Bonds, gold, and even small-cap stocks tend to outperform other sectors through recessions (though the cause of the recession is an important component in that calculation). There are places to make money, even when things start to look dire.
If you don’t have a playbook for the next recession, now would be the time to begin discussing one. Let’s open a conversation.
Chart of the Week
Another indicator on my recession dashboard is the Purchasing Manufacturer’s Index (or PMI), which is a gauge of the health of manufacturing, and in this indicator anything over 50 is expansion, anything under 50 is contraction. It can be a bit noisy, so it must be viewed in the context of other indicators, however, figures at or below 50 tend to create amenable conditions for a recession.
This week, we get the latest view of PMI, and a post below 50 would make this another a warning sign.
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