Franklin J. Parker

What I Care About This Week | 2023 Feb 20

Posted by Franklin J. Parkeron February 20, 2023February 21, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

Markets seem pretty bipolar these days. For the past few months, investors have latched on to “the Fed is almost done raising rates” narrative. That has led many assets higher (including stocks). That narrative is shifting yet again, however, as investors are reassessing the path of the Federal Reserve (trust me, I am as tired of talking about the Fed as you are of hearing about it). Anyway, stocks are feeling a bit “toppy” at these levels, and a correction seems likely, especially in light of the Fed’s continued aggressiveness.
Earnings season is coming to a close, with about 80% of the S&P 500 having reported. It has been pretty disappointing, and it appears that companies have made about 5% less money than this time last year. This, coupled with the deteriorating fundamental economic data, urge caution. For investors with shorter time horizons, this is the time to batten down the hatches. In my view, there are more pressures downward than upward right now.
This week we get data on the global economy, and we get the Fed’s preferred inflation gauge: Personal Consumption Expenditures (PCEs). Investors are watching closely for PCEs to continue their downward trend (+5.0% was last month’s print). A flatlining here would be troublesome for markets. We also get data on personal incomes, and with WalMart and Home Depot reporting earnings, we also get some insight into the health of consumers.

The Details

Investing ethically is something talked about a lot these days, but what does it really mean? In my recent book, I give an example that illustrates the key point of ethical investing:

Imagine a company that makes 65% returns a year for its shareholders. Not only are these returns doable, but in your estimation 65%/year is a conservative estimate. The catch? This company employs slave labor in their manufacturing process (overseas, of course).

Clearly, no one would invest in this company! Given an entire marketplace of investors who turn down so lucrative an offer, there is, therefore, no investment return that justifies the enslavement of other humans.

Which illustrates an important point about investing ethically: we all do it, at least on some level. We all have a set of ethics which we would not violate, no matter the potential return.

Yet beyond some common items (which are mostly enshrined in law codes, anyway), we are all a little different in what exactly matters to each of us individually. Some investors prefer not to invest in oil & gas companies, others would prefer not to invest in gambling companies, still others would prefer to take an active role in their proxy voting, and some investors are fine with what the law says on a given topic.

And here is the key point: Investing ethically is just as individualized as everything else about us. Which means there is no one-size-fits-all solution. Your ethics matter. Imputing your ethics into your investments requires considerable portfolio customization, just like your other financial goals. What’s more, determining what you may be willing to give up to achieve those ethical objectives is yet another nuanced conversation that should be had.

In the end, this is a topic that requires care and conversation. And that is something we would love to discuss with you.

Chart of the Week

Finance can be rather heartless. We often talk about big-picture things such as inflation, Fed policy, interest rates, and so on. Yet, there are real human struggles underlying these figures. That is the subject of this week’s chart.

The “Misery Index” is a reflection of the that unemployment and inflation are the two leading causes of economic pain. In the chart below, we can see the Covid-induced spike, which was primarily driven by unemployment. Now, however, levels are being driven by inflation. Of course, both of these were not compounded, which is the danger in a recessionary environment (like the 1980s, when this index was at its highest levels).

It is good to remember that under all of these facts and figures, market swings, and economic data are reflections of actual human experiences.

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.

What I Care About This Week | 2023 Feb 13

Posted by Franklin J. Parkeron February 13, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

This week we see more earnings, with AIG, Coca-Cola, Cisco, Deere (and several others), all reporting. In general, this has been a disappointing earnings season. With about 60% of S&P 500 companies having reported, it appears that, on average, companies have seen about 5% less profit than last year at this time. Of course, that is not evenly distributed across sectors, as our Chart of the Week demonstrates.
Tomorrow we get the all-important inflation figure. At the moment, analysts expect prices to have increased about 5.5% over last year, which is certainly down from the peak but still much higher than the Fed’s 2% inflation target. A figure higher than 5.5% would easily move markets lower, while a figure less than 5.5% could move markets higher. We also see retail sales, industrial production (which is on my recession dashboard), producer prices, and housing starts. All of these are important pieces of the economic picture.
The market’s recent rally off of its October bottom has been rather dramatic, and it does fuel a fear of missing out (often dubbed FOMO in financial news). As I read the data today, however, it appears to be driven by hopes of continued economic growth and a general shrugging-off of the very real recessionary dangers that lurk in this economy. This rally, therefore, has given investors the opportunity to lighten their risk load, though, as usual, the specifics of your goals will determine what risks are acceptable for you.

The Details

Everyone is talking about the Fed (including me). What’s the big deal?

The Federal Reserve was established by Congress in 1913 in order to centralize control of the nation’s monetary system — banks, currency, interest rates, etc. Congress outsourced the management of monetary policy to the Fed with a mandate to maximize employment and price stability (often called the dual mandate).

In order to accomplish those objectives, the Federal Reserve has a few knobs it can turn.

First, and most famously, the Fed can adjust the amount of interest it pays banks for cash on deposit. Since the Fed is the safest investment a bank can make, anyone who wishes to borrow money must compete with the Fed’s rate of interest. Uncle Joe, then, will have to pay a higher rate than the Fed if he wants to borrow money to buy a car (because Uncle Joe is considerably less reliable than the Fed).

Second, the Federal Reserve can create and destroy US dollars. The mechanisms involved here are not straightforward, but, essentially, they print money and use the US Treasury and financial markets to put those dollars into circulation. They can also remove dollars from circulation.

Finally, and considerably less well-known, the Federal Reserve, through its oversight and regulation of the banking system, can adjust the amount of credit on offer in the economy.

Each of these “knobs” can be dialed up and down in order to achieve their mandate of low inflation (a.k.a. price stability) and full employment. However, full employment and price stability are traditionally seen as competing with one another: in order to lower inflation, the Fed must lower employment, and vice versa.

In the end, these tools have effects on both the real economy and financial markets — and those effects are not always aligned. Creating dollars and lowering interest rates has kept employment high, but also pushed asset prices higher, overwhelmingly benefitting the wealthiest. When attempting to deal with inflation, the Fed pulls back those dollars and increases interest rates, sending asset prices lower, but also tending to increase unemployment.

With so much power over both the economy and financial markets, the Fed has become the central player in market analysis and forecasting. So, regrettably, we have to discuss the Fed much more than usual these days.

Chart of the Week

This week’s chart comes to us from FactSet and shows the earnings growth of S&P 500 sectors relative to what their expectations were at the end of Q4 2022. Energy has performed the best while Materials and Communications Services performed the worst (which was expected at the end of last year). Ultimately, it appears that large US companies will report a decline in earnings of about 5% over this time last year.

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.

What I Care About This Week | 2023 Feb 6

Posted by Franklin J. Parkeron February 6, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

We are in the heart of earnings season, with about half of the S&P 500 companies having reported. Earnings season is pretty lackluster so far, with a decline in profits of about 5%, and the outlook has grown a bit dimmer for this year’s earnings. Last week, the Fed raised rates by 0.25%, and markets now expect two more 0.25% rate hikes — one in March and one in May. The big news of last week, however, was the unexpectedly strong employment figures. The headline unemployment rate dropped to 3.4%, driven by strong hiring in the services sector, and job openings increased by 750,000 openings! Both were considerably stronger than expected.
Looking into this week, we have several more big-name companies reporting such as ActivisionBlizzard, Chipotle, Disney, and Kellogg. CEO commentaries and outlooks are becoming more important as analysts are concerned about a potential recession this year. After last week’s data deluge, not much macro-economic data posts this week.
Lots of hope has moved through the market, and many speculative bets are back on. That said, other than employment (a key variable, for sure), the economic data has continued to deteriorate. Manufacturing posted lower than expected last week, but was largely overlooked because of the Fed’s rate announcement. Earnings are in bad shape and expected to get worse. Ultimately, I believe caution is warranted in this environment.

The Details

Let’s talk about gold. It’s up about 13% from its bottom in October.

Really, it is the advocates for owning gold that I want to discuss — you know, the “gold bugs.”

Let me be clear up front: gold absolutely has a role in the overall diversification of your investments. It tends to zig when other things zag, and that is very helpful in an investment portfolio. You probably should own at least some gold in your portfolio (and how much will be determined by your goals).

But that is not the typical argument you hear for owning gold. More often what you hear is that gold is the only real money, that it is the only real store of value. Usually, there is the apocalypse argument (“its all that will matter if the world falls apart”) and tied closely to that is the “only own actual physical gold” argument.

How true are these claims?

First of all, there is really nothing special about gold. I’m not sure why it even has value, to be perfectly honest. There are some industrial applications, but you can’t eat gold, you can’t drink it. The reason we hear “it is the only true money” is only because we all believe it has value… so it does. In fact, gold’s appeal may simply be an accident of history and chemistry.

Consider the price of gold since 1981. From 1981 to today gold has increased 210%, which sounds great! Until you also consider that lead has increased 200% over the same period. And both pale in comparison to large-cap US stocks which have increased 2900% in price since 1981 (that isn’t a typo, 2900%). What is so special about gold again?

What about as an apocalypse hedge? We actually have some data on this, believe it or not. We can look at examples of failed economies and determine the utility of gold. New Orleans after hurricane Katrina comes to mind: even then, gold was pretty worthless. What mattered in that environment was food, water, and gasoline. Sure, in places like Venezuela, gold is being used as a currency, but only tiny slivers of it. Anyone with significant stashes of gold are probably more worried about theft than where they can spend it. What we learn from natural disasters and failed economies is that food, water, and gasoline are the currencies that matter.

In any event, owning some gold in your investment portfolio makes since. I would, however, caution most investors from owning significant amounts of the physical commodity. Not only is it expensive to trade and store, but I just don’t see the reason for it.

Gold just isn’t all that special.

Chart of the Week

Market drawdowns can be scary. 2022’s pullback in the S&P 500 saw about a 25% pullback from its peak. Market pullbacks like this come in all shapes and sizes, of course, but the larger pullbacks are rare.

What 2022 just gave us is in the “rare, but expected” category. As this week’s chart shows, drawdowns of 25% or more have happened 9 times since 1950 — that averages to just over once per decade. Rare, but certainly expected. The question, of course, is whether this one will continue (because of a recession), or if the recovery is underway.

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.

What I Care About This Week | 2023 Jan 30

Posted by Franklin J. Parkeron January 30, 2023in Uncategorized1 Comment

by Franklin J. Parker, CFA

The Summary

Hold on to your lunch, this is a big week for markets. First, on the data front: we get unemployment data on Friday (3.6% expected), job openings on Wednesday, and factory orders. We also see earnings results for some big names, such as Caterpillar, McDonalds, Meta, and Apple. The big event, however, is the Fed’s meeting this week, and Wednesday’s announcement of their target rate. Markets expect a 0.25% rate hike this week, but commentary and any change to their balance sheet management will easily push prices around.
Last week gave us some important data, too. Global PMIs indicate a contraction in general economic activity. US GDP was a bright spot, posting a bit higher than expected at +2.9%. That said, with about 30% of the S&P 500 companies having reported, corporate earnings have not been good. As it stands, it is expected the largest US companies will report a 5% contraction in earnings, compared to a year ago. This is the first time since 2020 that companies have reported less profit than a year ago.
Overall, I have grown very cautious. The market may well be mispricing the Fed’s aggressiveness, and corporate earnings combined with deteriorating economic data seem to indicate that a recession is brewing. In short, caution is warranted right now, and building some defensiveness into portfolios is a reasonable strategy. If you have not talked through how to prepare your portfolio for a recession, let’s open that conversation together.

The Details

Let’s talk “can” versus “to” in retirement.

As an advisor, I see my role as one of counseling and execution, but not judgement. Here is what I mean: if my client wants to retire to a treehouse in the mountains of Idaho, my job is to help her retire to a treehouse in the mountains of Idaho, not to judge whether or not that is a worthy goal.

I am, however, going to break with my usual ecumenicism and offer some of my experience as a thoughtful observer.

There are, in my experience, two views of retirement. The first is the classic image: I cease working one day, have a party, get a watch, and retire.

There is a problem with this view: it sees retirement as a destination, not as a path. Most couples will spend about 30 years in retirement — that is a long time to spend at a destination! Which brings us to the second view.

Retirement is a journey, with a lifecycle all its own, and it requires vision, creativity, planning, and acceptance.

I have found that people do much, much better when they retire to something. Something meaningful, something that gets you up on Monday morning, something exciting. That something is different for everybody, of course, but without that retirement can be a long slog, believe it or not!

This is, of course, only a casual observation. Even so, if you find yourself nearing retirement, I would encourage you to think about what it is you would like to retire to, rather than thinking about retirement as only a can.

Chart of the Week

This week’s chart looks at the progression of earnings by sector through time. Once the market leader, Technology has dropped considerably — suffering from both a contraction in earnings, and a contraction in the multiple investors are willing to pay for those earnings (a contraction in the price-to-earnings ratio).

Only a select few sectors have pulled ahead, including Energy, Industrials, Utilities, and Consumer Staples. I will note that these are all defensive sectors, and their leadership in the market is a recessionary signal.

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.

What I Care About This Week | 2023 Jan 16

Posted by Franklin J. Parkeron January 16, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

Earnings season has begun, and this quarter’s reports are very important for the outlook of the economy and markets. As it stands, S&P 500 companies are expected to report making 2% to 4% less money than they did at this time last year. This would be the first quarterly contraction in earnings since the Covid-induced recession in 2020. Several major banks reported earnings on Friday and despite delivering strong results that beat expectations, banks have set aside considerable funds to offset loan losses in the coming year. JPMorgan, for example, set aside $1.4 billion in this quarter — no small sum.
Last week’s big news was inflation which posted exactly in-line with expectations: 6.5%, year over year. In response, investors adjusted their expectations for the Fed, now anticipating a 0.25% rate hike from the February 1 announcement. I am not so sure that is the right move, since the Fed has repeatedly warned that they will continue being aggressive until inflation is under control. Again, according the Fed’s own data, that means pushing the economy into a recession. I do not expect them to back away from that plan.
The Bottom Line. I see a recession forming this year, and investors may do well to use recent rallies to lighten their risk load. While it is certainly possible that markets rally from here (especially if the Fed delivers a 0.25% rate hike), the deeper economic data indicates a slowing economy. Coupled with a potential earnings contraction in this quarter and the next, and it is easy to see how prevailing risk is to the downside.

The Details

Well, the debt ceiling is back in the news. Why does it matter to investors?

The debt ceiling is a check on the power of the US Treasury. In a nutshell, congress authorizes spending but gives the US Treasury lots of leeway over how to fund that spending. Obviously, ongoing tax receipts are a major source, but because the government spends more than it receives in revenue the US Treasury must issue debt to cover the shortfall. Congress says that’s okay, but only up to a point. That is the debt ceiling.

Investors view US government debt as among the safest debt in the world. This means that lots of cash is tied up in US government debt — and that is typically cash that cannot afford to be lost. Furthermore, because investors see little to no chance of default in US government debt, it is the benchmark by which all other debts in the economy are priced. That is, if I can lend my money to the United States at 4.5% and get paid back for sure, I will need to earn more than 4.5% on my money to lend it to my uncle Jack since I have much less of a chance of getting paid back.

For the US government to default on her debt obligations, not only do lenders to the government lose money they cannot afford to lose, but the fundamental benchmark of the economy is undermined. Investors would have a strong sense of vertigo while scrambling to find a new benchmark from which to price home mortgages, car notes, credit card rates, and other bond rates.

In short, the US government outright defaulting on her debt is an economic catastrophe. Which is why investors care so much about the chances of that happening.

Chart of the Week

Many financial analysts and news organizations have dedicated an inordinate amount of time to the question of what the Fed’s next move might be. There is good reason for this, as the chart below demonstrates. The S&P 500 has followed the Fed for the past year — as rate expectations have risen (black line, and lower means higher rate expectations), markets have fallen. Even divergences (like March-April of 2022) get reversed pretty violently.

Since October, the market has begun to rally away from the Fed, and partly because expectations have begun to level off. However, poor economic data is beginning to take over, and that may yet push markets lower.

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.

What I Care About This Week | 2023 Jan 9

Posted by Franklin J. Parkeron January 9, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

Last week’s unemployment figures were very good, with the headline unemployment rate ticking downward which was unexpected (last month’s revision also reversed the recession signal we saw here last month). Services PMI, however, signaled a contraction for the first time since 2020. The services sector has held the economy afloat for the most part, so a contraction here does not bode well for the economic outlook. Despite the negative news, markets traded higher, almost entirely in response to the market’s new expectation for a 0.25% rate hike from the Fed (as opposed to a 0.50% rate hike).
This week we see data on consumer credit, consumer sentiment, and the all-important inflation data for December. Inflation is expected to tick downward from 6.0% to 5.7%, and that would likely fuel further expectations of the Fed being less aggressive in its rate hikes. This week also kicks off earnings season with the big banks reporting on Friday. Last quarter saw earnings slow considerably, and investors expect earnings to contract in this quarter (see this week’s chart).
In my view, investors have mispriced the Fed’s actions at the end of the month, and that may be a serious error. While there are signals the economy is slowing (and I believe a recession is forming), the signals the Fed is watching have not changed much, and I expect a 0.50% rate hike while the market expects a 0.25% hike. If the Fed holds its course, markets are likely to give back much of the gains we’ve seen in the past couple of days. When coupled with a lackluster earnings season and recessionary signals, it is easy to see that caution is warranted here.

The Details

Why do we care so much about looking out for, and protecting against, recessions?

Because the order of your returns matters.

Imagine two real-world investors, both with $500,000, both earning a 12.2% average return over 30 years, and both making 6% withdrawals from their portfolio.

Lucky begins his retirement in 1981. By 2010, he has over $5,000,000—10x his original investment! And that is after going through 2008.

Unlucky begins his retirement in 1930 and makes the same 6% withdrawals. His portfolio doesn’t last past year 10, despite investing in a 30 year period that made the same average return as Lucky’s.

The reason is that the order of your returns matters. Having bad first years can destroy your ability to maintain a lifestyle through retirement (or any ongoing goal). Understanding these kinds of risks and working to offset them is a very important aspect of goals-based investing, and something we look at closely.

Chart of the Week

Analysts see a rocky first half of this year, with an expectation for earnings to contract around 2% for last quarter (but reported this quarter), and then staying flat until the back half of this year. My view is that the back half of the year won’t be much better than the front half, and could be considerably worse. We will be watching the data closely.

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.

What I Care About This Week | 2023 Jan 3

Posted by Franklin J. Parkeron January 3, 2023January 3, 2023in Uncategorized

by Franklin J. Parker, CFA

The Summary

Happy New Year! 2022 was a difficult one in markets, to be sure. Whether a recession actually formed in 2022 has yet to be announced, but there is no question that the economic data deteriorated considerably. Risky assets closed the year down 20% or so, and the very risky corners of the market were either wiped out or closed down considerably worse (looking at you cryptocurrency!). More and more analysts are expecting a significant recession in 2023, as am I.
Some important data posts this week. Unemployment will be the big item with a headline rate of 3.7% expected, but factory orders and the look at manufacturing will be important, as well. Investors have placed a 65% chance that the Fed will hike rates by only 0.25% at their meeting this month, which could set markets up for a downside surprise. Fed actions had the most influence on markets last year, and this year is likely to be similar.
Caution is ever-more warranted, and now that yields have come back, holding cash-like assets makes more sense. I see a recession as likely this year, and investors with goals to achieve should weigh what risks are appropriate given their time horizon. Having a recession playbook seems sensible in this environment, and if you don’t have that, let’s talk it through.

The Details

I see a recession as likely this year.

In the end, this forecast is driven by the underlying economic data. No matter how you slice it, the economic data indicates an economy that has slowed considerably. Manufacturing, services, consumer spending, even many of the classic recession indicators, are all flashing yellow and red. Not to mention, the Fed is still restricting monetary policy and that is likely to push markets down even further.

Of course, it is notoriously difficult to predict exactly when the recession will hit. Even so, taking precautions now might make some sense.

But how should investors prepare? The trouble with the question is that the answer genuinely depends on your situation. For investors with a decade or more until their goal, staying invested and taking the lumps may well be the most appropriate answer. For investors who are a few years from their goals, building up cash and getting defensive may be the better option.

In any case, this is a topic you should be addressing now. Once the storm is here, it is much more difficult to prepare—or repair.

Chart of the Week

This week’s chart is a look at the index of leading economic indicators. As this chart shows, this index tends to peak and then begin falling ahead of recessions. It can be some time before the actual recession hits, however. As you can see, a year to 18 months is not uncommon. In February 2022, this index peaked, and has been falling ever since. This is one of the several recessionary indicators we are getting.

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.

What I Care About This Week | 2022 Dec 12

Posted by Franklin J. Parkeron December 12, 2022in Uncategorized

by Franklin J. Parker, CFA

The Summary

The Bottom Line. All eyes will (yet again) be on the Federal Reserve this week. Inflation is still running hotter than expected, but investors are hopeful the Fed will slow down its pace of rate hikes. That said, the economic data has deteriorated significantly over the past few weeks, and many of my recessionary signals are flashing caution. While there may be some upside from here, investors might do well to be careful.
This week we get inflation data for November, a key data point before the results of the Fed’s meeting on Wednesday. Markets expect a post of around 7.3% (which would be down from October’s 7.7%). Much higher than this and markets would see a more aggressive posture from the Federal Reserve. On Thursday, data on retail sales and industrial production post. Industrial production is a figure I watch closely, and it has slowed over the past few months. A negative posting here would add to the recessionary signals.
As a minor note, the US Congress faces a deadline Friday to pass a spending bill to continue funding the government. According to Reuters, Democrat and Republican negotiators are about $25 billion apart—not much considering the $1.5 trillion in funding that is required. While I see a low probability for a government shutdown (brinksmanship has become part of the job these days), it is something investors should keep an eye on just in case.

The Details

As we close out the year, there are some “to-dos” that tend to pop up. On the investments side, one of them is tax-loss harvesting.

Tax-loss harvesting is a helpful tool. In short, you sell investments that have lost value before year end. This gives you a tax credit that you can use either now or in the future to offset gains when you sell an investment at a profit.

This year’s market volatility has given some investors an opportunity to capture that tax benefit. Now that my outlook has shifted to the negative, booking losses today gives us two immediate benefits in the face of potentially more losses next year. First, we get the tax benefit. Second, we get the cash to deploy at lower prices in the future. Of course, the latter reason carries some risk that markets move higher instead of lower. But, in a volatile market, cash gives us the luxury of future choices.

Considering these tax advantages is important—especially in this environment! And, it can be an incentive to go ahead and dump some of those stocks you’ve been waiting on to recover, but suspect never will.

Taxes can be boring to talk about, but incorporating taxes in your investment strategy is a must! Tax-loss harvesting is an important component in managing your investments efficiently.

Chart of the Week

Industrial Production is a figure that is on my recession dashboard. While not perfect, we do tend to see a contraction in production over the 6-months leading into a recession (sometimes more), but certainly not always. At the moment, we are not seeing a contraction in industrial production, but it is getting close. A drop of 0.5% or more in November would be a recessionary signal.

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.

What I Care About This Week | 2020 Nov 28

Posted by Franklin J. Parkeron November 28, 2022in Uncategorized

by Franklin J. Parker, CFA

The Summary

The Bottom Line. My outlook on the US economy has shifted significantly over the past couple of weeks. A recession, while not imminent, does appear to be forming. Of course, pre-recessionary markets can still deliver solid returns, but I am watching the fundamental economic data closely, and this week we get a lot of it!
We get several important data points this week. Consumer confidence, job openings, headline unemployment, personal consumption expenditures, factory orders, and PMI all post this week. I am watching very closely for signs of a recession. An uptick in headline unemployment and a downtick in PMI and factory orders would confirm my suspicions that the economy is weakening, but we need to wait and see what the data says.
Protests in China’s largest manufacturing hubs have sparked concerns among investors that supply chains may again be disrupted. Speaking of supply chains, there is growing worry that the largest railroad unions will strike, and the union representing all dockworkers on the west coast has yet to agree to a contract with ports. All three of these represent critical infrastructure for the movement of goods, and a failure at any point would significantly slow an already-sputtering US economy.

The Details

It is no secret that recessions cause damage to investment portfolios. There are, however, several considerations investors should keep in mind.

First, markets tend to price about six months ahead of the news. So, the drawdown in markets tends to begin around six months before the recession begins, and the recovery begins six months before the end of the recession. Understanding when a recession might begin or end is a critical component to managing risk.

Second, your goals—not just the overall market environment—should inform the risks you can take in your portfolio. There are drawdowns, for example, which are too great to recover from, and understanding the limits of your portfolio is a critical element to managing your risk (a topic I address in my latest book).

Finally, recessions do not treat all investment types equally. Bonds, gold, and even small-cap stocks tend to outperform other sectors through recessions (though the cause of the recession is an important component in that calculation). There are places to make money, even when things start to look dire.

If you don’t have a playbook for the next recession, now would be the time to begin discussing one. Let’s open a conversation.

Chart of the Week

Another indicator on my recession dashboard is the Purchasing Manufacturer’s Index (or PMI), which is a gauge of the health of manufacturing, and in this indicator anything over 50 is expansion, anything under 50 is contraction. It can be a bit noisy, so it must be viewed in the context of other indicators, however, figures at or below 50 tend to create amenable conditions for a recession.

This week, we get the latest view of PMI, and a post below 50 would make this another a warning sign.

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.

What I Care About This Week | 2022 Nov 21

Posted by Franklin J. Parkeron November 21, 2022in Uncategorized

by Franklin J. Parker, CFA

The Summary

The Bottom Line. After an initial bounce, markets have faded just a bit with questions about whether the Fed will acknowledge the lower-than-expected inflation data. Hawkishness seems to pervade, and Powell has repeatedly said that he would rather over do it than under. By my read of the economic data, there is a storm brewing on the horizon, but the economy has yet to enter a dangerous recession. Caution is warranted, but it appears pessimism is dominating, which may offer some opportunities.
OPEC is considering increasing their oil production significantly, sending oil prices lower. This would alleviate a lot of pain in prices, both in the US and especially in Europe. Lowered energy costs also gives consumers a bit of a boost, and just in time for the Christmas shopping season. Moreover, lower energy prices should help push down inflation figures, adding some fuel to the “central banks can slow down” narrative.
Expect a light trading week this week, and a return to business with reports on Black Friday shopping and retailers taking the spotlight next week. This week, durable goods orders will post and global manufacturing PMIs. Both will be watched, but they are unlikely to move markets much.

The Details & Chart of the Week

One of the most reliable indicators of a pending recession is the yield curve.

I specifically look at the difference between yields on 10-year US Treasury bonds and 3-month US Treasury bonds. In a normal environment, you get paid more to tie up your money for 10-years than you do for 3-months, but leading into a recession that relationship inverts. This week’s chart plots the difference between the two.

As you can see, over the past week, the yield curve has inverted and inverted quite strongly. When coupled with everything else, this is a signal that a recession may be beginning to develop.

However, a careful observer will note that it is not the inversion per se that signals the recession. Rather, it is the recovery from that inversion that signals a recession is imminent. In past recessions, the curve reverts about 3 to 10 months prior to the official start of the recession, meaning we have some time to sit and wait.

The point is: caution is warranted, but the current level of pessimism may be overdone.

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.