What I Care About This Week | 2023 Jan 3

man looking downwards of stairs
Photo by Avinash Singh on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • Happy New Year! 2022 was a difficult one in markets, to be sure. Whether a recession actually formed in 2022 has yet to be announced, but there is no question that the economic data deteriorated considerably. Risky assets closed the year down 20% or so, and the very risky corners of the market were either wiped out or closed down considerably worse (looking at you cryptocurrency!). More and more analysts are expecting a significant recession in 2023, as am I.

  • Some important data posts this week. Unemployment will be the big item with a headline rate of 3.7% expected, but factory orders and the look at manufacturing will be important, as well. Investors have placed a 65% chance that the Fed will hike rates by only 0.25% at their meeting this month, which could set markets up for a downside surprise. Fed actions had the most influence on markets last year, and this year is likely to be similar.

  • Caution is ever-more warranted, and now that yields have come back, holding cash-like assets makes more sense. I see a recession as likely this year, and investors with goals to achieve should weigh what risks are appropriate given their time horizon. Having a recession playbook seems sensible in this environment, and if you don’t have that, let’s talk it through.

The Details

I see a recession as likely this year.

In the end, this forecast is driven by the underlying economic data. No matter how you slice it, the economic data indicates an economy that has slowed considerably. Manufacturing, services, consumer spending, even many of the classic recession indicators, are all flashing yellow and red. Not to mention, the Fed is still restricting monetary policy and that is likely to push markets down even further.

Of course, it is notoriously difficult to predict exactly when the recession will hit. Even so, taking precautions now might make some sense.

But how should investors prepare? The trouble with the question is that the answer genuinely depends on your situation. For investors with a decade or more until their goal, staying invested and taking the lumps may well be the most appropriate answer. For investors who are a few years from their goals, building up cash and getting defensive may be the better option.

In any case, this is a topic you should be addressing now. Once the storm is here, it is much more difficult to prepare—or repair.

Chart of the Week

This week’s chart is a look at the index of leading economic indicators. As this chart shows, this index tends to peak and then begin falling ahead of recessions. It can be some time before the actual recession hits, however. As you can see, a year to 18 months is not uncommon. In February 2022, this index peaked, and has been falling ever since. This is one of the several recessionary indicators we are getting.

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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