What I Care About This Week | 2023 Aug 7

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by Franklin J. Parker, CFA

The Summary

  • Most large US companies have reported earnings for the quarter. It appears that earnings have declined just over 5% — not as bad as expected, but still the 3rd quarter in a row of earnings declines. As an aside, about 1 in 3 companies have issued negative guidance on earnings for the year. We also got data on the services and manufacturing sectors last week, both were tepid. Manufacturing continues its contraction while services remained at about breakeven. Of course, the big news was unemployment, which ticked down from 3.6% to 3.5%. Overall, last week’s data deluge was mixed. Consumers remain strong and they are likely to keep the economy afloat a bit longer. Everything else, however, looks shaky.

  • Amazon delivered a big earnings surprise on the back of Amazon Web Services (AWS), demonstrating that they are carving out an important niche in the infrastructure of technology, especially the compute needed to fuel AI, but also in their consumer sales which was the main driver behind sales growth. Apple and Microsoft disappointed investors, although Apple’s new iPhone launches in September. With three quarters of price increases along side an earnings contraction, valuations appear to be stretched. Without a strong catalyst, I struggle to see how this market can push beyond its previous high.

  • This week we see data on inflation, which will be key to gauging the Federal Reserve’s ongoing rate policy. Investors see about a 30% chance of one more rate hike before year-end, and Friday’s data is likely to push that expectation around. Also of interest this week is a read on consumer credit, expected to increase from $7 billion to $13 billion (that is not an unusual move — anything below about $30 billion is pretty normal). As I have said every week for a while now, I am seeing the early warnings of a recession, but I have not gotten the “recession is here” signal. As always, your goals will dictate exactly what you do with this outlook, but caution seems prudent.

The Details

Why do we care about market drawdowns? Okay, stupid question, let’s rephrase: how much should we care about market drawdowns?

Most people don’t like to lose money — but why? If we are confident that our investments are high-quality enough to weather a storm and come rushing back, why do we care if they fall in price for a period of time? For over 50 years now, the standard advice in the industry has been somthing like Stay invested no matter what; Don’t worry, it’ll come back; Just buy and hold forever. It is a reasonable thing to say in general, because it is true that a long-term bet on the health of developed economies has been a good bet.

The problem, however, is when you find yourself approaching your financial goal. Once you find yourself needing the money within a short period of time, those market downswings can become a real problem. Of course the market will come back, but will it come back in time for you to accomplish your goal? If your portfolio loses 30% and only moves 15% higher before you need the cash, you have to change your plans. Or, worse yet, if you are taking withdrawals from your portfolio, your portfolio may not come back at all!

The key here is to base this understanding of losses on the math of what you need doing — on your goals — not to base it on feeling. Even though all losses feel excessive, only some losses are actually unrecoverable. Understanding when losses are too much is an analysis we do here at Directional Advisors. And, to help conceptualize the idea, we launched a free tool on the website that you can play with to get an idea of how it works.

Everything in investment management must be done with a mind to your objectives, to your goals. In the end, investments are just tools to get a job done. Let’s make sure we reach for the right one.

Chart of the Week

Population trends over the coming decades is now a major theme now being discussed. With China struggling to replace their aging population, and with the ongoing decoupling of the West from China, there are questions about where labor will be sourced in the future. With a working-age population that is expected to grow from about 750 million to around 1.5 billion over the next 25 years, Africa — though varied and certainly nowhere near as monolithic as China — is standing out as a contender. Might we see a similar scale of wealth-creation and standard of living increases over the next 25 years like we saw in China over the last 25 years?

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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