Author: Franklin J. Parker

by Franklin J. Parker, CFA

The big news last week was the US GDP report — it appears the US economy shrank by 0.3% in the first three months of the year. There were some wonky effects, such as a huge increase in imports as businesses and individuals rushed to get ahead of tariffs (a negative) combined with a large buildup in inventories (a positive). What concerned me most about the data, however, was the contraction in consumer spending. It has been the consumer who has kept the economy afloat, and signs of struggle there may not bode well for the larger economy. More about this in this week’s Chart of the Week (see below).

Last week we also saw unemployment figures for April — a few more jobs than expected were created, however the unemployment rate remained steady, more due to people leaving the labor force rather than people finding a job. Overall the employment situation in the US appears to be deteriorating, though it is certainly not in freefall. We need to keep a close eye here.

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We are now about three-quarters of the way through earnings season, and it is going well. Overall, it appears companies will report earnings growth of 12.5%, which is above average. That said, many analysts and companies are reducing their earnings expectations for the year in response to the Trump administration’s tariff policy. Corporate earnings have been the bright spot in this economy and if they can maintain good earnings growth, there is likely a floor to any market selloff.

I continue to urge caution in this environment. Despite corporate earnings, the early signs of recession are flashing. Investors have seen a reprive with the recent rally, but we still are still below some key levels in markets. For investors who are approaching a goal, downside risks currently loom larger than upside potential, at least in my view.

Chart of the Week

This week’s chart demonstrates how much consumers and businesses have pushed to get ahead of tariffs. Inventories increased as businesses imported and stocked what they could (blue in the chart below), while overall imports pushed a significant drag on the economy. To be fair, the GDP calculation assumes trade imbalance as a net negative to GDP growth, but the truth is much more complicated than that. I would expect these effects to go away in the next quarter — inventories are likely to shrink (creating a drag), government expendures appear to be shrinking (creating a drag), and net trade is likely to have litte to no affect. That leaves the size of consumer spending and private investment to make up the difference. The big question is: will they?

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.

by Franklin J. Parker, CFA

A little over one-third of US companies have reported earnings. While earnings have been overall positive — companies are reporting about 10% profit growth over this time last year — there has been a significant rise in both uncertainty and cost cutting. Citing tariffs and overall policy uncertainty, CEOs are cutting travel, slowing hiring, and delaying major investments (such as factories and warehousing).

This week is a big data week with the unemployment rate, manufacturing and non-manufacturing PMIs, job openings, first quarter GDP, and personal consumption expenditures (the Fed’s preferred measure of inflation). All of these have a direct bearing on the Federal Reserve’s reaction to an economic slowdown, and we have have seen investors dramatically price and re-price the Fed’s interest rate policy over the past several weeks. At the moment, markets expect the Fed to hold rates steady until their June meeting, at which point they expect the beginning of steady interest rate cuts through the end of next year. My take is that the Fed will not be able to cut as much nor as fast as markets are hoping, largely due to tariff-inflicted price increases (leading to stagflation).

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The active reduction in costs and delaying of significant investment by companies are tell-tale signs of a recession. Policy uncertainty is playing a significant role here. Without a clear understanding of the future policy landscape (will there be tariffs or not? can we hire non-US workers or not? etc), business owners/leaders are much more likely to just hunker down until policy becomes steadier and clearer. At any rate, despite decent earnings growth, I am reiterating my view that our current environment is recessionary and investors should prepare accordingly.

Chart of the Week

Durable goods orders posted a big upside surprise last week. Investors expected 2% growth and instead saw 9.2% growth last month. In another environment this might be good news, but this was almost certainly an effort by consumers and businesses to get ahead of the tariffs, so we would expect to see a signficant decrease in orders in coming months.

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.

by Franklin J. Parker, CFA

We are in the heat of earnings season, with major banks having reported last week. Overall, financials have performed very well, delivering strong earnings. This week we see earnings from 122 of the 500 companies in the S&P 500. Tariffs are, of course, a central conversation in these calls with investors. We still expect to see earnings growth of 10% or so.

The US dollar has taken it on the chin the past couple of weeks. About 40% of revenue earned by US companies is earned overseas — meaning a weakening dollar is actually a good thing (ironically) for these companies reporting earnings in US dollars. That said, there is substanial worry about the ongoing viability of these earnings if the trade war is not resolved sooner rather than later.

Speaking of the dollar, there is a little-discussed consequence of reforming the US as a non-import-based economy. When the US imports goods, we receive goods and the country that exported those goods receives dollars. So, we get stuff from Vietnam and Germany, for example, and now Vietnam and Germany have dollars. Now, when Vietnam and Germany wish to trade, they can easily trade in dollars because they both have them. This helps make the US dollar the dominant currency in the world (the “global reserve currency”). However, if the US restricts imports, dollars become more scarce on the global stage and that weakens its position as the global reserve currency. This has not been something that has been discussed, but it is a long-term consequence of curtailing US imports.

Trump has now taken aim at Federal Reserve chairman Jerome Powell, and investors have reacted negatively to that. During the campaign, Trump suggested the central bank should be under control of the executive branch, an idea that, if enacted, would be extremely damanging to monetary stability. Countries where central banks are under direct control of political leaders tend to see higher inflation and poorer economic outcomes. At any rate, investors are now wondering whether that was campaign rhetoric or a serious policy proposal.

Chart of the Week

After a period of strengthening relative to other major currencies, the US dollar has given back its gains and has been largely in freefall since the tariff announcement. This week’s chart looks at the Euro/Dollar exchange rate over time. After touching $1 for €1, $1 now buys only €0.87. This can make US goods more attractive to overseas buyers, which might be an economic spur in the short run. However, this dollar slide is widely believed to be a consequence of the flight of capital from the US, which is a larger problem. If the US ceases to be a home for international investment, that means there is less capital to build everything from infrastructure to factories — a longer-term economic negative. As usual, why something is happening is more important than the event itself.

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.

by Franklin J. Parker, CFA

This week’s big news is still Trump’s tariff regime — the ongoing questions of who/what is included and who/what is excluded. The Trump administration announced a 90-day pause last week on tariffs to all countries except China, with whom the US tariff rate now stands around 130%. There are some limited exceptions (including smartphones and some electronics). China, of course, responded with sweeping tariffs on US-made goods.

If global tariffs do end up being rolled back, that will be an overall good for the US economy. On our current course (and, admittedly, that course changes almost daily), with our current tariff rate on China I see the US slipping into a recession, but not as bad a one as I feared last week.

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In other news, earnings season as begun. Investors will be digesting reports over the next couple of weeks. In particular, there will be many quesitons about the new trade regime the Trump administration is pursuing. Earnings are expected to grow about 10% over this time last year (which is good growth — a lone bright spot among the bad economic data), but outlooks will be scrutinized closely. If investors are unconvinced this growth can continue, I expect to see markets deteriorate further (though less suddenly than last week).

Lastly, there is the economic data to consider. On the upside, inflation posted slightly lower than expected. If that holds, we may see a Fed more able to deal with a downturn. This week, we will see retail sales (an important figure!) and industrial production.

Overall, I am reinforcing my view that a recession is likely this year. It probably has not already begun as earnings contractions are a hallmark of recessionary environments. That said, markets tend to anticipate recessions by 3 to 6 months. As I mentioned last week, now is the time to talk to a financial advisor about preparing your portfolio for a recession.

Chart of the Week

This week’s chart (from Fathom Consulting) demonstrates the hand-wringing over the Trump Administration’s new tariff regime. As the chart shows, the effective tariff rate is moving from just under 5% to over 30% — a significant increase. Tariffs increase the price of goods. Some of that increase is absorbed by the importing business (lowering profits, bad for investors), and some of it is passed along to consumers (bad for consumer spending, which is about 75% of the US economy). While others can debate the merits of the tradeoffs involved, investors need to be aware of the change in the bottom line of businesses and the economy!

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.

by Franklin J. Parker, CFA

The trade war begins.

Tariffs were far worse than most expected, and the methodology used to create them was quite shallow. Essentially, the Trump administration simply looked at the balance of trade between the US and another country and roughly estimated what increase tariff would make imports fall enough to match US exports to that country. They then added a baseline tariff of 10% to everyone, which makes little sense. The UK, for example, was hit with the baseline tariff of 10% despite the US having a trade surplus with the UK (we export more than we import, Trump’s stated goal of this policy). This method yielded absurd results, like a 29% tariff levied on Norfolk island, home to a mere 2200 people and exporting a whopping $270,000 to the US.

There is no way to slice this as a positive, in my view. This is a massive, self-inflicted economic wound. Tariffs are taxes paid by consumers, and the Trump administration just levied a giant extra tax on the entire US economy. Without a quick U-turn, I cannot see how we avoid significantly higher price inflation and a significant economic contraction. In short, this is a return to the policies that created the terrible stagflation in the early 1980s.

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That said, we had been prepared. As I have mentioned repeatedly in these weekly updates, I have been cautious. A recession has been brewing for a while now, and there is always a trigger that pushes the economy over the edge — it just so happens that this time it is tariffs. For our clients, we have been much heavier cash than we normally would be, and we have been that way since at least late February (though every client is different). Of course, if the Trump administration removes this extra tax, we may well get a signficant rally in markets, so that is something we will watch for.

How low can markets go? In a typical recession, we see US markets sell down 30% to 40% off of their highs. That would put the S&P 500 selling down to around 3660 to 4270 (Jan 2020 levels). In more extreme recessions, we see 50% to 60% drops in markets. That would put the S&P 500 down around 2440 to 3050, levels we haven’t seen since 2016.

We will have to wait and see how this develops, but for investors within five years of their goals this market environment might be very damanging. If you are not already a client, now is the time to have a conversation with us about your portfolio.

Chart of the Week

Personal consumption — basically, people buying stuff — has been the driver of US economic growth for many years now, as this week’s chart demonstrates. As a way to look at the problem of tariffs from a different angle, this week’s chart shows that personal consumption represented about 2.5 percentage points of GDP growth in the last quarter of 2024. That chunk of economic growth now faces a new 22.5% tax. It is easy to see how a reduction in consumption — and it wouldn’t have to be a big reduction — could push us into a recession.

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.

by Franklin J. Parker, CFA

Tariffs begin taking effect this week, and it has been automakers who are in the crosshairs. The first tariffs come online April 1, and many automakers are warning of significantly increased costs to consumers and substantial time and cash to retool their supply chains.

Price pressures have remained stubborn. Last week, we saw the Fed’s preferred measure of inflation (personal consumption expenditures) post slightly higher than expected. Coupled with their commentary from the week before, it appears that the Fed may be unable to offer relief to investors any time soon. If stagflation sets in, it may be an even longer time before central banks are able to come to the aid of investors.

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We see more important economic data this week, including job openings, manufacturing and services health, and the unemployment rate. All are important, but it does appear that investors now see a recession as much more likely. Earnings may serve to change market sentiment, but those are still two weeks away and CEOs are very pessimistic, with almost half believing a recession is likely within the next 12 months.

In short, the Fed has been sidelined by stagflation fears, the economic data is not good, and tariffs are sowing doubt for US growth. A very good earnings season may salvage the outlook, but that seems unlikely given the sentiment of CEOs. For investors with goals to achieve in the next few years, I believe this is a time for caution.

Chart of the Week

One of the common selling points I here about cryptocurrency — specifically Bitcoin — is that it offers diversification benefits. Because different forces push it around, it is argued, it can help you reduce risk in your portfolio when held with US stocks. Unfortunately, I haven’t seen that argument work out so far. As the chart shows, Bitcoin has moved up with stocks (specifically US technology stocks), and moved down with stocks as well. It is, in that sense, just like owning US tech stocks, but with more volatility and bouts of 10% 1-day losses (or gains).

This isn’t to say you shouldn’t own it in your portfolio, rather (1) much of the analysis we read on the internet about crypto is easily disproven with a simple look at the data, and (2) if you are going to own it, understand exactly why you own it!

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.

by Franklin J. Parker, CFA

Constructing a narrative around market and economic data is both beneficial and troublesome. Beneficial, because it helps our human minds take in data by making that data part of a story. We are generally better at understanding how stories develop, and — more importantly — how they might end. Troublesome, because narratives can capture our minds and keep us from taking in data that is contray to the story we have constructed. As investors we need to use narratives, but not hold too tightly to them.

Why does this matter? Because, right now, the economic data is difficult to parse. It has consistently given support to more than one narrative, and, just last week, the Fed highlighed yet another narrative to consider: stagflation. Stagflation is when the economy stops growing while prices keep going up. It is damaging because, typically, prices fall when economic growth stumbles and the Fed cutting interest rates leads to improved growth and higher prices. Stagflation, however, ties the hands of the central bank. They can’t spur economic growth by cutting rates because that would send prices higher, while raising rates would worsen economic growth and do little to offset prices.

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Typically, stagflation is the result of a supply imablance in the economy. Enough people want certain goods and yet those goods cannot be produced and delivered efficiently, usually due to a policy that constrains businesses. Last week’s projections by the Federal Reserve suggested that they belive stagflation is now the likely narrative for the US economy. Better than recession, I suppose, but not by much.

My view is that a recession is still the most likely outcome, though any number of things could serve to reverse that. At the moment, tariff policies threaten to constrain businesses (and hence the stagflation narrative), but the Trump administration has already walked some of that back. In any event, the real issue facing the US eocnomy at the moment is employment, which has continued to worsen, and put US consumers under additional strain (see this week’s chart).

Chart of the Week

One clue that all is not well with US consumers has been the consistent increase in mortgage delinquencies. While dwarfed by the delinquencies seen in the Great Financial Crisis of 2008 – 2010, and the Covid lockdown of 2020 – 2021, delinquencies have risen by around 20%, every quarter, for the last six quarters in a row. If we assume that people pay to keep their homes first, this is a signal that peeople are experiencing quite a bit of strain, and other spending may also be under pressure.

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.

by Franklin J. Parker, CFA

It is Fed week! Investors expect no change in rates. In fact, markets expect the Fed to hold rates steady until their June 18 meeting. On the data front, we also see retail sales and industrial production this week. After last week’s surprisingly low consumer sentiment report, the health of retail sales is becoming more important.

Last week, inflation came in basically in-line with expectations, which markets reacted pleasantly to. I mentioned the 5800 level being important — were it breached prices were likely to become slippery (it was breached, and prices did become slippery). The next important level is 5500. There has been some support here, but I don’t expect it to hold without a significant change in the underlying economic data.

Again, I am affirming my view that a recession is brewing (if not already here). The tariff war is likely to be the catalyst, but the economic data has been decaying for some time now. To change my view on this, I would need to see the unemployment rate fall (due to job gains, not people leaving the labor force as has been the recent reasons for its fall), strong earnings growth, and strong retail sales.

Chart of the Week

We have discussed this figure before, but bankruptcy rates in the US have increased to recessionary levels over the last year. Starting in early 2024, we saw a 40% increase bankruptcy filings. Though that figure has come down somewhat, it still remains very elevated. As the chart shows, this expansion in bankruptcies is a tell-tale indicator of a recessionary environment (with the Covid recession being the exception).

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.

by Franklin J. Parker, CFA

Employment was center-stage last week with the unemployment rate ticking up slightly to 4.1%. More surprising, however, was the mediocre job creation number of 151,000. Total job creation has been on a steady decline through last year into this one, and that is an ongoing concern. We also saw consumer credit increase in January by $18 billion — about $4 billion more than expected.

This week is an important data week, with job opening figures and the all-important inflation figure for February. Of course, all of this could easily move markets, especially the inflation figure. Fed chair Powell mentioned last week that the Fed does not need to be in a hurry to cut rates. Markets were predictably dissapointed. A higher-than-expected inflation print would easily push prices lower as investors adjust their rate-cut expectations.

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Overall, I am reinforcing my view that the economy is likely to see a recession soon, especially with the trade war gaining steam. The upward momentum in markets has stalled and, after last week’s price breakdown, perhaps begun trending downward. This week’s chart illustrates that we are likely moving into a recessionary market environment, defined by downward momentum and deteriorating economic data. I am again urging caution and possible risk controls for investors who need them. Understanding your downside risk tolerance is a layer of analysis we do here at Directional — we’d love to talk with you.

Chart of the Week

Each market environment has its own defining characteristics. In an expansion, we see strong market momentum and strengthening economic fundamentals. However, as the economic cycle comes to an end we see a long, slow deterioration of economic fundamentals, but market momentum remains strong. In a recession, market momentum finally gives way and turns downward. As the economy heals, the economic data improves, but momentum tends to lag behind.

As the chart shows, we have moved closer to the “recession” quadrant over the last month or so, largely driven by the deterioration of market momentum. Last week’s break below the key 5800 level by the S&P 500 was a bearish signal as it saw the reversal of the strong upward push we had seen over the last 18 months.

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.

by Franklin J. Parker, CFA

Markets have steadily deteriorated in the face of a growing trade war. As it stands, US stocks have given back all of their post-election gains. Moreover, we saw a break below the key level of 5800 in the S&P 500 today. While it is never easy to tell, this does signal to me a significant negative shift in markets.

As I have said many times, the underlying economic data is poor, despite corporate earnings being very good. With a trade war in full swing and the security of Europe in doubt, it appears investors are becoming more convinced that such strong earnings are unlikely to continue. Of course, the waning hype in AI is also contributing to investor skepticism.

Overall, I am again urging caution, as I have been for some time. We need to see economic data improving — significant job gains, a jump in retail sales, service sector expansion — for the risks of recession to really go away. That said, markets could stage a comeback were the Fed to jump in with a surprise rate cut, or if the Trump administration suddenly rolls back tariffs in a negotiation.

Chart of the Week

How tariffs affect prices is a complicated question to answer. The Wall Street Journal recently offered a very helpful analysis that demonstrated that the affects are not the same for all types of products. Generally, for products with lots of competition and little brand value, there is almost no shift in consumer prices. However, for products with only one source (like Avacados which are almost exclusively imported from Mexico), prices are likely to shift quite a bit.

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