by Franklin J. Parker, CFA
It now seems very settled that the Federal Reserve will begin cutting rates at their September 18 meeting, the only question is how much. Investors originally reacted positively but have since turned sour on the idea — in my view, this is because investors are realizing what has been historically true: the Fed cutting rates at this point is a recessionary signal, not a bullish one.
We saw quite a bit of economic data over the past week, and it is overall negative. Even the unemployment rate — which was celebrated last week for ticking down slightly — is signaling a slowdown. On that note, last years jobs figures were revised: the economy added 800,000 fewer jobs than we originally thought last year. That works out to about 67,000 fewer jobs per month, a significant number! This week, we see the all-important inflation data. Markets expect inflation to move down slightly from 2.9% to 2.6%. As usual, this figure could easily push markets around.
Let’s Connect
Overall, I am urging caution. The last domino to fall will be the yield curve. As the Fed cuts rates, we expect short-term rates to move back below long-term rates, which is a strong “the recession is here” signal. It also appears that the AI rally has died almost completely: Nvidia, for example, has fallen 28% in just a couple of weeks. And, of course, we haven’t even discussed the volatility that typically happens around a presidential election.
For investors with goals to fund in the next few years, this is likely a time to be much more conservative than you would normally be. For investors with much more long-dated goals, this is much less of a concern, of course. If you would like to discuss how our view affects you and your goals, let’s chat.
Chart of the Week
The Index of Leading Economic Indicators is one of the recessionary signals we follow, although it is among the slowest to develop. The recession signal is when the index peaks and begins to fall. On the chart we have written the number of months between the peak in the index and the beginning of a subsequent recession. Previously, the longest gap between the peak and the recession was 21 months — March 2006 to December 2007. We are now beating that record with 30 months (and counting) since the peak of the index.
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.