Memorial Day is always a weekend of reflection remembering the ones who have served, and the ones still serving. This country is a better place for their sacrifice and allows us to have what we have, even if we disagree. Still more people are trying to get into the USA, not the other way around.
I couldn’t resist with the second title, as all I seem to hear is that we are going to have a recession in the economy as the Fed is raising interest rates to curb inflation. At this time, we have seen the following:
An earnings recession.
A stock market correction bottoming last October 2022.
Still no signs of an economic recession.
And an asset price recession. (see chart below).
Asset Price Recession
From Torsten Slok of Apollo we have the insightful analysis that we are going through an asset price recession (correction, see the chart below).
“What makes the coming recession so unusual is that it is happening after almost 15 years of money printing, which never really had any major positive effect on GDP growth. Instead, the 15 years of money printing created a significant bubble in asset prices.
As a result, the big correction during this recession will not be in the economy but in asset prices as the Fed continues to deflate the buy-everything bubble created due to global easy money.
A mild economic recession with a big recession in asset prices is what we call a non-recession recession.
With inflation currently at 5%, well above the Fed’s 2% inflation target, the ongoing correction in asset prices will continue as the costs of capital will stay elevated well into 2024." - Torsten Slok
The biggest problem with 15 years of money printing is that eventually we had no price discovery. Quite simply, one could justify almost any project or large purchase with interest rates close to zero. This made financing very easy if one did not pay cash. As a result, prices only went up, interest rates went down, and as a result the cost of financing went down. A vicious circle until it ends. Inflation.
My personal opinion is that the US Fed raises interest rates 1 – 2 times at most and waits to see what inflation does. If it stays the same or goes down for 6 months or so, they will start to cut interest rates. It will NOT be quick.
The above chart is one of the more interesting pieces of economic information as personal consumption counts for 71% of GDP. Other indicators to consider include the impact of small businesses on the economy (those with under 500 jobs):
There are 33.2 million small businesses in America, which combined account for 99.9% of all U.S. businesses, and they employ around 45% of America’s workforce.
Wherever I drive in the Southwest (Texas), I see job openings.
It is no surprise that personal consumption has not fallen significantly.
Earnings Season First Quarter 2023
With 97% of the companies reporting, 78% of the companies had positive earnings surprises and 76% had positive revenue surprises. Why, corporate pricing power has improved in the U.S.
Currently we are sitting at a forward price/earnings ratio of 19.4x which is a little higher than the average of 17.8x, which suggests to us the market is fully valued unless we see interest rate cuts within the next year.
There has been a lot of chatter recently on Artificial Intelligence, an up and coming technology one is starting to see in daily life, generally unknowingly. For example, I received two small windshield “stars”, called Geico Glass, and the appointment after a number of prompts was set up without talking to a human.
The number of companies mentioning artificial intelligence on the earnings calls has gone up dramatically, a technology we must watch as it will affect the economy, generally in a disinflationary bias.
As always, we live in interesting times, and it is a joy for us to try and understand what is happening here in the US and around the world as it affects investments.
If there are ever any topics you wish for us to explore, please let us know. We are here to help and guide you through these times.
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Richard Mundinger, CFA