What I Care About This Week | 2023 July 24

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by Franklin J. Parker, CFA

The Summary

  • It is Fed week! Markets expect a 0.25% rate hike but see this as the last hike until cuts begin in December/January. Overall inflation has moderated quite a bit, although core inflation has remained stubbornly high, and Fed officials have indicated quite strongly that they do not feel the war on inflation is over just yet.

  • This week is a big week for earnings as we hear from numerous big companies including Google, Microsoft, General Motors, Verizon, Boeing, and MasterCard. Last week’s reports were disappointing, with Tesla and Netflix letting investors down. Overall, the expected earnings decline has increased from about 7% to about 9%. This week will be telling to see if earnings continue to shrink more than expected.

  • We got data on the US services sector this morning (which represents about two-thirds of the US economy) showing the sector is growing more slowly than before — barely growing at all, in fact. Of course this is not the only indicator that matters, but it is an important one. With the yield curve inverted, companies seeing contracting profits, and the Federal Reserve continuing to hike interest rates, I continue to be cautious. The possibility of a soft landing (no recession) is growing, but carries a small chance in my view.

The Details

Should I invest in _____?

This is, as you can imagine, a very common question that I answer. What you may not expect is that there are two versions of it. The first version comes from clients who see things on social media, or read things in the news, and want to discuss whether it fits in their portfolio.

The second version of this question, however, is more pernicious.

When I am in social situations and people find out that I am an investment advisor, it is not uncommon for them to ask about some hot investment topic. The question should I invest in _____? naturally comes up, and, admittedly, my response ranges depending on the situation. Sometimes I’ll discuss the pros and cons of the idea, sometimes I’ll simply say “I really can’t say without knowing more about you.”

The response I would like to give, however, is this: That question is an indication that you do not have a cohesive investment strategy. If you have a cohesive investment strategy, it will tell you the answer to that question! Should you buy or sell X? Your strategy will tell you. Should you invest in X? Your strategy will tell you.

Hand-wringing over whether you should or shouldn’t do something is a signal to get a cohesive investment strategy. Build one, borrow one, or buy one, but do not go into financial markets without one! That is like going to sea with no idea how to navigate. Don’t do it!

Our strategy at Directional Advisors has been tested, peer-reviewed, and even won an award. If you find yourself without a cohesive strategy, we would be happy to talk through ours with you.

Chart of the Week

This week we look at the market’s current expectations of the Fed’s activity over the coming months. A month ago, markets saw current rates as the peak, right now however, markets see rates moving higher and then beginning to decline into 2024. Since this is the expectation, a change from this path would easily move markets.

All eyes will be on Powell’s commentary Wednesday.

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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