If one was to watch CNBC or Bloomberg for one hour, they would be left with completely divergent views on the state of the capital markets. As we have always heard, for every stock sold there is a buyer. Similarly, for every opinion shared, there is an opposite viewpoint. Listening to numerous Chief Investment Strategists, it is clear that significant differences exist from firm to firm. So how is one to interpret these varying viewpoints? We would suggest stepping back and attempting to establish a more macro perspective of the landscape.
From 40,000 feet, the picture and “media noise” is somewhat reduced.
Macro headwinds continue to drive market direction. Currently there are legit concerns for a global recession. Although economic conditions on the surface here in the US feel weak, they feel (and are) even weaker globally. As the FED and other Central Banks slowly removed the punchbowl from the party, investors are now feeling the subsequent hangover.
Fortunately, the US GDP for the third quarter trended up from the previous two quarters. So, it would appear that the US is not in “official recession.” The same cannot be said for European & Asian markets, as they are distinctly facing negative growth.
As an extension, it is logical to question how long international economies can remain weak before that weakness is felt here domestically. Several economists suggest that avoiding negative growth next year will be challenging. BaldwinClarke tends to mostly agree with that assessment. We expect to see an increase in unemployment (from the 3.5% unemployment reported in September) as corporations adjust to the realities of today’s environment. But we do not anticipate a level of unemployment that dismantles consumer contributions toward GDP. Said differently, we expect a softening in growth but feel it is unlikely to generate a profound & prolonged recession.
FED monetary policy has created new realities for the markets.
There has been a complete change in market leadership. Performance once dominated by technology & growth stocks has shifted to value stocks. High quality, dividend paying stocks have held up well this year. Whereas their growth counterparts have languished. Former markets leaders like Facebook/Meta, Amazon, Google & Microsoft are all down in excess of 30% year-to-date. Oil/energy, healthcare, food & beverage, defense and travel have been positive contributors to market returns. Our investment philosophy of designing “style neutral” portfolios and often value (stock) centric strategies has been helpful as they are designed to address the realities of market cycles & leadership changes.
As we look forward, we recognize the importance of remaining well diversified. Markets will always have cycles. Fortunately, bear cycles tend to be considerably shorter than bull market cycles. As FED policy adjusts in the future, a market bottom will (eventually) be established upon which a recovery period will start. Remaining appropriately invested and well positioned for this transition will be important. Although certainly not easy, patience and maintaining a long-term perspective is what is required going forward. There will be brighter days ahead.
Sean P. Clarke
Managing Director: Investment Advisory
Baldwin & Clarke Advisory Services, LLC