by Franklin J. Parker, CFA
The Summary
- It is earnings season! This week’s focus will be technology, with Apple, IBM, and Microsoft reporting. The technology sector is expected to report earnings growth of about 5%, however, all of that gain is expected to come from Nvidia. If you factor out Nvidia, analysts expect technology to report 3% fewer profits than last year. Overall profit growth for S&P 500 companies are expected to be flat on average. Financials have been a bright spot, however, with the sector reporting almost 15% higher profits over this time last year.
- This week we see data on durable goods sales, personal consumption expenditures, and the first GDP figures for Q3. Analysts are expecting GDP to post around 4.2%, which would be a pretty stellar figure and would likely have a mixed effect on markets. Such a high figure gives the Federal Reserve plenty of cover to continue hiking rates. That said, investors have reassessed the Fed’s potential path of rates after Powell’s commentary last week that he feels they have made substantial progress in the fight against inflation.
- At the end of the day, the fundamental economic data is not particularly good. Unemployment is still low (though rising), and retail sales were very strong last week — the two bright spots in the economy. However, we are entering the fourth quarter of earnings contractions, manufacturing is in contraction, and services are pretty much flat. Borrowing costs are the highest they have been in decades. Bankruptcies have increased 20%+ over last year, and the delinquency rate on subprime auto loans has risen to over 6%, which is the highest level since the data started in 1994. Cracks are beginning to show in the economy. Obviously, healing those cracks would be ideal, but that does not seem likely. More likely is a recession, so investors would do well to build some caution into their portfolios.
The Details
With world events as tumultuous as ever, let’s talk this week about how we can build a robust financial plan.
First, and most importantly: you need to articulate your goals very clearly. What is it you want to accomplish in the world? Do you want to simply maintain your lifestyle? Do you want to work on something meaningful? Do you want to build your business? Do you want to live on a rowboat in the middle of Lake Eerie?
Understanding what it is you want to do not only helps you organize your resources to accomplish that objective, it also helps you understand what things might happen that would derail your plan. That is, the objective defines risk.
Of course, once you have identified the risks in your objective, you can take steps to mitigate those risks. Once you’ve defined your objective, for example, maybe you see that you cannot possibly obtain your goal if you only use a savings account. Cash, in that instance, may be the riskiest investment you can make! Or, perhaps you discover that a bad year in your business is the riskiest thing that could happen. Now that you know, how could we offset that risk?
After defining goals and uncovering the risks which threaten them, you have to constantly update and adapt. Life is not static, your financial plan cannot be static either! Reassessing and re-evaluating — with an eagerness to identify and learn from what didn’t work — is a critical ongoing step.
While this three-step process is simple, this is not particularly easy. Defining goals is actually pretty difficult. Understanding the risks to those goals also takes some mental effort. And, of course, the ongoing execution and response to the real world is very difficult. That’s why it helps to have someone on your side to help. If you don’t have someone, we’d love to chat.
Chart of the Week
This week’s chart is an update to our “Is Life Getting Better?” Index. This chart looks at annual wage growth times total employment (only employed workers see their wages grow, after all), and then subtracts inflation. The absolute number is not the key point, but rather the change. On the upside September’s figure was about the same as August, however, the overall change post-pandemic has been dramatically lower.
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