by Franklin J. Parker, CFA
- Through some last-minute wrangling, congress managed to extend funding for the US government by 45 days. It appears that Speaker McCarthy’s political position is now vulnerable, but that is of less concern to investors. While a shutdown itself is not particularly noteworthy economically, it does add to investors’ waning confidence in policymakers to steer the ship.
- The United Auto Workers expanded their strike last week, calling out 25,000 workers. While this may seem to be an event isolated to a small corner of the economy, there are knock-on effects. In 1998, for example, a 54-day strike at GM of 9200 workers led to the loss of 150,000 jobs nationwide. Of course, that was 25 years ago and the world is a bit different today, but the point is that these effects are not linear. When coupled with the increased demands on consumers — student loan payments restarting, higher oil prices, and higher borrowing costs — there is an argument to be made that even small shocks can have larger-than-expected impacts.
- We see important data this week: job openings, a look at the health of the services sector, factory orders, and unemployment. While I still have not gotten the “recession is imminent” signals, I still see more downside risk than upside in this market. Caution is warranted, especially for investors with goals to achieve in the nearer-term. If the data starts to turn positive (unemployment dropping or holding steady for months, and corporate earnings improving), then I will adjust that view.
Imagine you get invited to a dinner party, and all the best minds in finance are there. Nobel-winning economists, big hedge fund managers, guys who have been profitably trading for 30 years. Now, imagine you get to ask the dinner guests questions.
In essence, that is what markets give us. Every day, we are invited to a dinner party, and, while we don’t get to ask individual guests what they think, we do get to poll the audience with almost any question we have. Where will the price of oil be in 6 months? How much risk is in gold? Is the S&P 500 going up or down next week?
For those who know how to read markets, we have the dinner party’s answers to these questions every single day. Of course, the dinner party crowd isn’t always right, but — and this is the key — they are more right more often than you or I would be. That makes the dinner party a resource that we can mine for our benefit!
Indeed, this is my view of markets. By gathering the data of the dinner party crowd, we can use their collective insight to help us forecast what is happening next. In many ways, this is the core of our recession dashboard and these weekly commentaries about what is going on (and what might be next). It is simply the collection of the “dinner party wisdom.”
That said, there are certainly times the dinner party guests seem more distracted than usual, and we may disagree with their answers. Those times are rare, but when they occur there are exciting opportunities for those able to take the risk.
Chart of the Week
This week’s chart demonstrates what has been keeping this economy afloat. Most of the time, consumption of goods and services follows disposable income pretty closely. Covid, and the stimulus associated with it, disrupted the pattern considerably. As the chart shows, disposable income jumped while consumption dropped. Incomes have more-or-less stabilized, but the consumption of goods has grown in an abnormal and outsized way. Eventually, one would expect goods consumption to normalize and begin to track with incomes again. So far, however, that has not happened.
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