What Happen To the Recession?

The media knows that bad news sells better than good news. Even if the bad news is, at best, a speculation with little supporting evidence. A case in point is the relentless storyline in 2021 and 2022 of a pending recession if the Federal Reserve implements a rate hike campaign to slow inflation. The Federal Reserve not only initiated its first rate hike in March 2022 but proceeded to raise the discount rate inconceivably thirteen consecutive times from 0.25% to the current 5.50%, pushing the WSJ Prime Lending Rate to 8.5%.

Analysts and media talking heads were certain the Feds would put the economy at risk with rapid commerce decline with a high probability of a recession by early 2023. Their projections never came to fruition, and in fact, the economy has continued to expand.

American businesses continued to expand with increasing sales, which resulted in more hiring throughout 2023. Credit markets were negatively impacted, of course, and that resulted in a dramatic slowdown of commercial and residential loan refinance. Less lending activity reduced sales transactions in most real estate sectors. However, the Consumer Price Index (CPI) was rapidly approaching 9% annually in late 2022. That has reversed course and is now rising at an annual rate of 3.1%. The unemployment rate remained below 4% during the Federal Reserve rate hike campaign and is currently 3.7%, with more people working today than in 2022.

These factors were not missed by institutional investors. In early October 2022, investors began rebuilding their stock allocations with bullish expectations for the economy, resulting in the S&P 500 rallying 38.64% from October 11, 2022, through Friday, February 16, 2024.

Technology has been the standout sector, with NASDAQ rallying 49.9% in the same period.

We are reviewing this information to illustrate the importance of understanding the media, bias, and utility. As in most projections, there is some level of truth and worthwhile information to glean from their messaging. However, if one had developed their 2023 investment strategy entirely based on media projections, they would have most likely had a very conservative allocation of bonds and cash savings. The most devastated were hedge funds and investors who shorted the stock market, betting for a market correction or worse. The results were huge losses as the market rallied and their investments declined, with several long-tenure hedge funds closing in 2023 with significant declines in fund values.

The S&P 500 had a good run in the first half of 2023 that reversed momentum in late July, losing about 50% of the year’s gain over the next four months until bottoming on October 27. Then, as we projected, the stock market began a new rally in the fourth quarter, along with many all-time records reached during the 2023 retail holiday season.

The S&P 500 index dropped below its 20, 50, and 200-day moving averages (DMA) in late October and has since rallied back above all three DMAs, putting the index in a strong favorable technical status.

The perennial bears (always negative) were wrong again, and anyone listening would have missed another terrific year of economic and stock market gains.

Our approach to developing and adapting our investment strategy is to monitor economic indicators that have the most impact on the economy. Since consumer spending represents 66% of the US economy, our primary focus is on statistics that identify the financial health of consumer households, including spending, personal debt, sentiment, net savings, and income, to name a few. Most of this information is published by government agencies, including the US Bureau of Statistics and the Bureau of Labor Statistics. The more we studied these and other statistics last year, the more confident we were that economic conditions were stable and the risk of a recession was minimal.

By the middle of 2023, articles on pending recessions disappeared without explanations. The media simply walked away from this storyline with their tale between their legs and provided no apology.

WHAT DOES IT MEAN TO ME?

Our client model portfolios performed well last year, with standout returns in stocks, including Apple (AAPL) and Nvidia (NVDA), along with index funds. However, the victory lap is over, and now we are back to work formulating our strategy for 2024. So far, market conditions seem to be unchanged from 2023, and the stock market is off to a terrific start. Except for the Small Cap Index (S&P 600), all major indices are positive for the year. Below are their returns through today:

S&P 500: 4.31%
Dow Jones Industrial Average: 2.32%
NASDAQ: 4.13%
Mid Cap S&P 400: 0.95%
Small Cap S&P 600: -2.04%

We maintain a favorable view of the US economy and stock market. We will be trimming our allocations to the small-cap index that has trailed the mid and large-cap indices for more than 24 months.

Let us know your thoughts on this Weekly Brief. We welcome the opportunity to connect with you and assist you and your family in achieving your goals this year.