Author: Franklin J. Parker

by Franklin J. Parker, CFA

The big news last week was the Fed meeting. For the most part, they did and said what investors expected: they are expecting to keep rates higher for longer, and a rate hike is very very unlikely. Whereas investors previously thought cuts may come as soon as June, cuts are now expected to begin in September/October.

The unemployment rate ticked up last week — from 3.8% to 3.9%. This is a figure I watch closely because a sustained upward move in unemployment typically indicates a recession is forming. Also of concern last week was the services sector, which posted a slight contraction for the first time since December 2022. Services account for the majority of employment and economic activity (after spending), so a sustained contraction here would be a concern.

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Earnings also continue somewhat better than expected. Most of the companies in the S&P 500 have now reported, and it appears that companies will have grown earnings by about 5%. As I said last week, this is better than a contraction in earnings, but not by much. That said, consumer spending has stayed strong and that is showing up in retailer earnings. Consumer spending, like employment, is a critical variable to watch.

Chart of the Week

One of the most reliable recessionary indicators I watch is the Index of Leading Economic Indicators. As you can clearly see, this index tends to fall leading into a recession. What is so difficult about this economic cycle is the length and depth of the fall without seeing a recession. This index has now fallen for 36 months in a row without seeing a recession — the longest time in history.

Some argue that our traditional metrics are broken and that the expansion can continue without a recession. While I acknolwedge that is possible, I see it as a low probability. The data is pretty telling — a recession seems likely. Exactly when, however, that is the difficult part.

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! The Federal Reseve meets this week, and though everyone expects them to keep interest rates steady, Powell’s commentary on Wednesday could easily push markets around. Investors have been forced to adjust their expectations for rate cuts. Originally, the expectation was that rates would begin to fall in summer, but that has been pushed to the fall of this year.

Last week’s data didn’t help matters: economic growth posted lower than expected for the first three months of the year, and personal consumption expenditures (which is the Fed’s preferred measure of inflation) posted higher than expected. In all, the Fed has a ways to go to get inflation below 2% without a recession.

We are at about the halfway point in corporate earnings, with mixed results. Overall, the 500 largest companies are expected to deliver mediocre earnings growth over this time last year. That is better than a contraction, but not by much. Companies have struggled to grow profits in this environment — in fact, the largest contributor to earnings growth so far has been health care and energy, which tend to be defensive sectors.

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I am again reinforcing my cautionary view. While it does appear the economy is sputtering, it hasn’t fallen into a recession just yet. There is a possibility (though a small one, in my view) that the Federal Reserve will pull off a so-called “soft landing” and get inflation below their target while avoiding a recession. That said, the data is generally not positive. How all of this affects your portfolio is very dependent on your individual goals, and we would love to discuss that with you.

Chart of the Week

This week, we look at a breakdown of the recent economic growth figures for the first quarter. As expected, trade pulled growth down a bit. Of most interest to me was the slowing of retail sales. I have consistently said that the US consumer is keeping the economy afloat. If slower retail sales trend even lower into Q2, the economy will struggle to remain on a growth trajectory.

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 continues. As it stands, big US companies are still expected to deliver no growth in profits this quarter over this time last year. This week we see figures from Meta (Facebook), Microsoft, and Alphabet (Google). To get a sense of how much the top 7 stocks are influencing the market as a whole: if we factor out the top 7 stocks from the 500 companies in the S&P 500, earnings growth goes from flat to -6%. I am concerned that most companies in this market are not delivering any profit growth, and this may be a signal that the recent run-up in prices is driven more by hype than underlying fundamentals.

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The big news last week was Fed chair Powell’s comments that rates would likely stay higher for longer if inflation doesn’t move lower. This spooked investors, and pushed bond yields higher and stock prices down. It is a reminder that policymakers do not appear to be okay with the “it’s good enough” argument. They really are committed to inflation at 2% or less. Investors are now expecting rates to begin dropping in August and November, rather than June (which was the previous expectation).

We get some important economic data this week, including a first look at first quarter economic growth (GDP), earnings, and durable goods. The Fed’s commentary last week was yet another example of investors getting their rate cut projections wrong — officials have consistently kept their policy response more galvanized than markets expected. Combined with the problems in commercial real estate and weak economic signals, I am still cautious.

Chart of the Week

Retail sales are a closely-watched figure lately, and rightfully so. In the US, consumer spending is almost three-quarters of economic growth. Looking at the raw figure, retail sales look like they have been holding up — however, when factoring out the effects of inflation, we see that retail sales have been largely flat over the last 18 monts or so. This is a concern, and may help explain why companies have struggled to increase earnings over that same period.

The 1 Thing That Makes Retirement Work (or Not)

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

Two big news items last week for investors.

First, inflation came in at the top of the expected range. Investors are now wondering if the Federal Reserve will cut rates as they expected. We have consistently seen investors reprice their rate cut expectations to be higher for longer. It appears the Fed’s actions so far have done little to slow down consumer demand — indeed, today we saw retail sales numbers that were much better than expected.

The second big piece of news were bank earnings. JPMorgan and Wells Fargo both reported earnings, and both disappointed investors. The money they are making from borrowing and lending — the core business for a bank — has stopped growing. That said, earnings reports so far have been mixed: some good and some bad (though only a handful of companies have reported so far).

Overall, the US economy continues to sputter along. Consumer spending is a key variable to watch, as is employment; those would be the last dominoes to fall if a recession is setting in. Earnings are also important, and we are now in the thick of earnings season. I continue to recommend caution, but exactly what that means to you is very dependent on your goals and personal financial situation.

Chart of the Week

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The US economy has bucked the global trend, consistently posting better-than-expected economic growth. The Eurozone has kept up until recently, where the UK and the EU have fallen into two quarters of contraction (which is my definition of a recession). The question, of course, is whether the US is subject to the same forces driving similar economies downward, or insulated from them.

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 begins this week with big banks like JPMorganChase, WellsFargo, Goldman Sachs, and Comerica. Overall, earnings at big US companies are expected to grow by about 3%. Given how much higher the S&P 500 has run, 3% earnings growth is pretty dissapointing. Also important: a higher percentage of companies are giving negative guidance on their earnings — that is, they expect their own earnings to be getting worse this year.

This week we also see the all-important inflation figures. Analysts expect a 3.4% inflation rate, much higher or lower is likely to push prices around because inflation is the main figure that the Federal Reserve is watching. A figure too low would be seen as accelerating the Fed’s coming interest rate cuts. A figure too high would be seen as delaying them longer. At the moment, everyone expects about two cuts this year, with the first coming in June.

Employment remains the bright spot for the US economy. Last week, the unemployment rate came in slightly lower than the month before, which is good news. Job openings also remained high. Employment is typically the last domino to fall in a recessionary situation, and continued strong employment is a good sign amidst a sea of otherwise poor economic data.

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Chart of the Week

Over the last year, we have seen stock prices grow faster than earnings in large US companies. Ultimately, growth in stock prices has to be driven by growth in earnings, so when the two mismatch for too long, markets become brittle and easily rattled. Not counting the Covid timeframe, this is the largest mismatch between price growth and earnings growth in the last 15 years or so.

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 Summary

This week we see important data on the state of the labor market. As we explored in last week’s post, the labor market is a recessionary signal that we watch closely because it heavily influences the stock market. Analysts generally expect about 163,000 jobs to have been created last month, and the unemployment rate to hold at around 3.9%. Figures significantly different from these would likely push markets around — though they would be interpreted through the lens of “how will the Fed react to this?“.

We also saw data on manufacturing this week. For the first time in one and a half years, US manufacturing was not in contraction. I am not too excited about the figure, however, because it shows that manufacturing is at breakeven levels. If we see consistently improving figures in the next few months, I would take that as a positive sign.

Overall, the economy still seems to be sputtering. Earnings season is a couple of weeks away, and that will shed some light on whether companies are coming out of a short “earnings recession” or whether a real recession is not far behind. The S&P 500 just had a stellar first quarter, but without underlying fundamentals to support it, I wonder how long it can continue. In the end, I am still recommending caution — exactly what that means for you and your goals? Well, let’s grab some coffee and talk it through.

Chart of the Week

Bankruptcies are one of those data points that is giving me pause. In the last quarter of 2023, bankruptcies were 40% higher than the year before. A 40% increase in bankruptcies is in the recessionary zone, and, yet, we haven’t seen GDP growth slow significantly. Also concerning is how closely the “down-up” shape tracks the 2006 – 2009 shape.

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 Summary

Last week’s big news was the Federal Reserve — they kept rates the same, and gave guidance on rate cuts that was just about in line with what was expected. Investors see a 70% chance of a rate cut at the Fed’s June meeting, with another expected at the September meeting. Ironically, at this point, I see rate cuts as a recessionary signal, though markets tend to rally on the news of potential rate cuts. In my view, the chances of the Fed engineering a soft landing are very very slim, and they may have already engineered the next recession (there is a recent article from Enterprising Investor on this topic that I recommend).

This week is a light data week, though we do get consumer confidence data tomorrow. There has been a serious disconnect between consumer confidence (which has remained relatively low) and consumer spending, which has remained high. Though people don’t feel good about the economy, they have money to spend and are willing to spend it — signs of weakness in consumer spending, however, could spell trouble for the US economy (of which 75% is consumer spending, though there is more nuance to this: see this week’s Chart of the Week). In all, I am still cautious (and I am getting tired of saying it week after week — I’m sure you’re tired of hearing it). Though markets are hitting all-time highs, the underlying economic fundamentals are not supporting it, leaving me concerned.

Chart of the Week

Excellent chart this week from Fathom Consulting showing the relationship between consumer confidence and equity markets. While there is some link, it is not a strong one. Consumer confidence is more closely tied with things like employment, as the second chart shows. When recessions are on the horizon, employment tends to falter and so does consumer confidence. This makes consumer confidence a very lagged and weak indicator for the stock market.

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 Summary

Inflation figures were the talk of the town last week. Headline inflation posting slightly higher than expected, but producer prices posted much higher than expected. This puts all eyes squarly on the Federal Reserve meeting this week, with investors hungry for guidance on the timing and path of interest rates this year. The expectation remains for rate cuts to begin in June, with about three total cuts for the year. Any commentary from the Fed that indicates less than that would likely be taken quite negatively by markets.

Retail sales were also disappointing last week. With the unemployment rate creeping up, I am re-emphasizing my (now long-held view) that there are some serious strucutral difficulties in the economy that need to be overcome. Seeing companies push profits higher would help me update this view (the majority of companies have not done this in over a year) . Or, if we see any of the other recessionary signals we have discussed here move in the other direction, my confidence in the path of the economy would grow. In sum, I am recommending caution — exactly what that means for you depends on your personal objectives.

Chart of the Week

The US Consumer has, for the most part, kept the US economy going. With manufacturing in contraction, services barely breaking even, and companies struggling to make profits, the consumer is the one bright spot. Retail sales, however, have been trending steadily down, to now at barely break-even. A contraction in retail sales would be an added concern for the health of 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.