by Franklin J. Parker, CFA
The Summary
- It is employment week! This week we see data on job openings, unemployment, consumer credit, and Fed chair Powell testifies before congress. Investors will be watching unemployment figures to see if the Fed’s rate hikes are being felt among workers. To date, job growth and employment has remained very strong, and all of this will feed into the market’s pricing of future rate hike and recession expectations.
- Last week, we saw manufacturing data and it continues to show contraction. This is one of the areas signaling weakness in the economy, though despite getting many “things are slowing down” signals, I have not yet gotten “the recession is here” signals. Admittedly, however, this is a very difficult environment to get a read on, and the Fed’s ongoing influence in the market distorts many of our traditional recessionary signals.
- I continue to be in a cautious wait-and-see mode. With corporate earnings in contraction, the last two dominoes to fall are employment and the Federal Reserve acting like a recession is imminent (they tend to cut rates just before a recession hits). This means that investors may do well to build up some cash and begin taking off riskier trades (like crypto, higher-risk bonds/stocks, etc), but making a big move (like selling everything) does not seem advisable. Though, as always, your goals will determine what risks you can afford to take.
The Details
People have told me before that they do not invest in the stock market because it is just a gamble. Is it? And what is the difference between gambling and investing, anyway?
I think some of this misunderstanding is because markets do seem random in their day-to-day pricing. Throw money in the mix (and that you could lose it), and suddenly we have what might look like gambling. In short: money + randomness = gambling.
Investing does involve some randomness, that is true. And, of course, investing involves money. But investing involves another very important thing: time.
Gambling is a very short-term affair: a few hours, a week, maybe a month. Investing, by contrast, is a long-term undertaking — years, rather than hours or days. The addition of a time horizon also serves to remove much (but not all) of the randomness in market prices. For example, since 1950, the S&P 500 had a 53% chance of being up on any given day, but in any given decade the probability of profit was 77% (and that is before dividends — dividends increase your odds of winning over longer periods of time).
Investing is about putting the odds of profit in your favor, whereas the odds for profit are against you when gambling. So, fundamentally, that is how I see the difference, and why I do not see investing and gambling as the same thing.
Chart of the Week
This week’s chart looks at the damage done by inflation and unemployment. While workers have seen their wages rise they have not risen nearly as fast as inflation, which is the first time since 2011-2012 that has happened. Another way to think of this: since the height of the pandemic aid programs in 2020, the general population has lost about 17% of their standard of living. Of course, it doesn’t go away overnight, but it forces people to eat into savings or borrow money to maintain, and that is both painful and cannot last long. Not to mention, recovering that standard of living can take years. In 2011, it was not until about five years later — in 2016 — that the standard of living was increased for the average American.
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