by Franklin J. Parker, CFA

It is Fed week! Invetors expect no change in rates, but everyone is listening closely for clues on path of rates. Investors are not confident the Fed will be able to continue on the same path — more likely, the Fed will keep rates steady for a longer period of time than originally expected.

We are also now firmly in earnings season. So far, reports have been strong, with companies reporting more growth than expected. Overall, analysts expect to see growth of 13% over this time last year, which is above average and a positive sign. Also this week we see some important economic data, including GDP growth for the last quarter of 2024.

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I am currently getting mixed signals. Earnings are good but stocks are still expensive, historically. Employment reports have been mixed — overall it has worsened, but not uncontrollably so —job openings have shrunk and yet consumer spending remains strong. Bankruptcies are up and yet loan defaults have not meaningfully increased. If the data would move firmly in one direction or the other, it would be helpful.

Though I am still on recession watch, I acknowledge that today is an unusual scenario and one which may elude traditional measurements.

Chart of the Week

Looking at earnings, we see that we are currently in a growth period. Earnings tend to decline leading into recessions, as does the price of stocks. However, during expansions, it is very normal for price growth to outpace earnings, which is what we are seeing now. We also see a significant price and earnings decline in 2022, which may well have been a “recession”, similar to 2015 – 2016. That said, both price and earnings can shift quickly.

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

Earnings season is off to a strong start. Last week the major banks reported very strong earnings, largely driven by a pickup in fees earned by advising other companies on mergers, acquisitions, and public offerings. The more important news, however, is that banks have lowered the amount of reserves for loans they expect to go bad. This is a positive development as that figure had been steadily climbing all through last year.

Inflation posted last week in-line with expectations, though still higher than the Fed would like it to be. With employment strengthening and inflation holding higher, investors are beginning to wonder how the Fed will respond.

With the inaguration today, investors will watch the Trump administration closely for clues about the regulatory regime: tariffs, bank regulations, Federal Reserve independence, and the overall business climate are all on the table. So, while this is a light data week otherwise, markets may move significantly if there are unexpected announcements.

Chart of the Week

After falling from its high of over 8%, inflation touched a low of 2.4% in 2024. The Fed had declared victory, however there are worries that this was premature. Since its low, headline inflation (which includes everything) has ticked back up and core inflation (which removes the most volatile items, like gasoline) has now moved lower. Some investors now believe the Fed lowered too quickly, and may even need to raise rates again. The next couple of months will be important to building an understanding one way or another.

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 big news last week was employment, which posted much stronger than expected. This is good news, ultimately, but markets tend to focus on how it affects the Fed’s plans for interest rates. As it stands, markets expect the Fed to keep rates where they are for a while longer.

In that vein, this week we get data on inflation. This could easily move markets around if it is much different than the 2.9% that is expected. Jobs and inflation are the two main concerns of the Fed, so seeing either of those post away from expectations is likely to move prices around quite a bit.

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As I mentioned last week (and the week before), I am now on recession watch. All of the traditional recession indicators are blinking red, and I see it likely that one starts within the next few quarters. That said, it is possible that the economy pulls higher before that happens — last week’s employment figures were a strong indicator that this could happen — and I am watching earnings very closely.

Earnings will be the final arbiter of whether the economy managed to miss a recession. At the moment, analysts expect earnings growth of 11% to 14%, which is much more in line with economic expansion. JPMorgan, Wells Fargo, Citi, and other major financials will be the focus this week. Also important in these earnings reports: the rate of loan defaults.

Chart of the Week

This week’s chart shows us the number of jobs created by industry. What we have seen over the course of 2024 is a contraction in manufacturing (green in the chart), but otherwise general growth in other industries (notice, how much Education and Health Services have grown over the past year — blue in the chart below).

It will be important to watch these figures to see if industries begin to slow down hiring (and which). For the moment, though, overall hiring remains strong and diversified.

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

Happy New Year!

As I mentioned in last week’s post, I am now on recession watch. Almost all of our recession indicators are blinking red, so I urge you to take steps to prepare. Of course, exactly what that means to you is entirely personal, and we should discuss it.

Last week, we got a look at manufacturing. The data improved somewhat, but US manufacturing is still in contraction. This week is important as we get a look at unemployment, a key input into the Federal Reserve’s rate policy. A point not widely discussed (until recently) is the number of long-term unemployed, which is up 50% since 2022. Many of these folks have pursued part-time work to help pay the bills and so may not even be considered formally “unemployed.” However, they are struggling nonetheless.

Again, this is just another indication that the underlying economy is not as strong as the headlines may lead us to believe.

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The future is, of course, uncertain. Just because clouds are gathering doesn’t mean there is 100% chance of rain. So, too, it is with economic forecasting. Investors within five years of their goal, however, are particularly vulnerable to excessive portfolio losses and it may make sense to put on a raincoat.

Chart of the Week

One of the main rationales for strong economic growth over the past couple of years has been strong consumer purchases. Looking at the numbers, however, we see a very different story. After adjusting for inflation, growth in retail sales has been negative, on average, for the past two years (blue line in the chart below).

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

What a difference a few weeks makes! The main news on my radar is the yield curve, which has normalized for the first time in two years. This is important because it is, historically, the last signal we get before a recession. Interestingly, in its wake, markets have begun to falter. Of course, it is always difficult to tell if any selloff will be short lived or indicative of a longer trend, but in my view now is the time to adjust your portfolio to deal with a possible recession.

Here are some of the recessionary signals I have seen triggered:

Yield Curve: Historically, when you get paid more to tie up your money for 3 months than for 10 years, something is wrong. When that relationship normalizes (you are getting paid more for 10 year debt than 3-month debt), a recession is typically not far behind.

Unemployment: While the headline unemployment rate is not a very good picture of actual employment in the US, the trend is what matters. When the headline unemployment rate rises above its 12-month moving average, we tend to see a recession not far behind.

Fed Rate Cuts: After the Fed raises rates signficantly, rate cuts tend to be indicative of a storm brewing on the horizon. This is usually because the Federal Reserve sees the economy getting and takes steps to get ahead of it. However, the Fed never admits a recession is about to happen, you can only watch their actions. The recent rate cuts fall firmly in the “recessionary” category.

Manufacturing: US manufacturing has been in contraction for over two years. While this represents a minority of the economy, it tends to indicate that all is not well. We get more data on manufacturing in the week ahead.

Index of Leading Economic Indicators: This index is a combination of several indices together. Historically, it tends to peak and then decline. Currently, we have had the longest and deepest decline on record with no recession. Given everything else, however, it makes sense that we may now be on the precipice.

Bankruptcies: Bankruptcies have increased by about 40% over this time last year — a substantial figure! It is not much of a jump to assume that there is some stress in the economy with such a rise in bankruptcies.

I have always said that, while we may not know when the first drop of rain will fall, we can generally see if there is a storm on the horizon. I now see that storm. Taking precautiouns against it might make sense. Though, exactly what that means for you and your goals is very personal, and something we should discuss.

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.