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- Weekly Market Commentary
- Brent Schutte, CFA
- Oct 24, 2022
A Word of Caution About Market Timing
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
During the past several months, we've made the case that the economy is slowing, spending habits are evolving and supply chains are healing, and that these developments would lead to backward-looking inflation numbers showing an easing of cost pressures for both businesses and consumers. Throughout this period, a steady stream of forward-looking data — including more out last week — has validated our thesis by showing progress on most fronts in our argument. Where we have been surprised is the lag time for forward-looking data to show up in backward-looking measures such as the Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE) numbers. Put simply, it has taken more time for inflation readings to show material improvements than we anticipated. Based on upward revisions of federal funds rate projections by both the Federal Reserve and the investment markets, it appears we were not alone in expecting more progress by now.
While the stickiness of inflation appears to have been underestimated by many, including ourselves, it is worth noting that in our view the question of receding price pressures continues to be one of when, not if. The economic rules of supply and demand have not changed. Inflation will subside at some point, and when it does, the market could be poised for a strong run from its recent lows. We make this distinction as an important reminder to those who may be contemplating abandoning their financial plan or selling out of the market in hopes of returning later when the next bull market begins. Trying to time the market perfectly is nearly impossible and can lead to painful missed opportunities for investors. As evidence, consider how the recovery from the Great Financial Crisis of 2007-09 unfolded.
Following a 17-month blur of volatility and losses for the major indices, the markets bottomed on March 9, 2009. There was no fanfare — no declaration that the worst was over, nor was there a signal on March 10 that the recovery had begun. In fact, the recession hadn’t yet ended when the markets turned higher. According to the National Bureau of Economic Research (NBER), which has final say on assigning dates for the beginning and ending of economic contractions, the recession didn’t end until June 30, 2009.
Perhaps more unhelpful for investors who tried to time the market back then, the announcement wasn’t made until September 20 of that year. Since it is true that NBER can be frustratingly slow in announcing start and conclusion dates for recessions, perhaps some investors waited for the end of downward earning revisions for companies — and by the time this occurred at the end of May 2009, the market was already up 37 percent from its bottom.
Following other signals, such as Leading Economic Indicators (LEI) from the Conference Board, led to similar missed opportunities. We’ve highlighted this forward-looking report several times in recent months as an indicator we use to gauge the trajectory of economic growth. Here, too, the market was well ahead of the data. It wasn’t until August of 2009 that the six-month annualized reading pointed to an expanding economy — and by that time, the S&P 500 had rallied 53 percent from its lows. The examples are seemingly endless; by the time the recovery showed up in employment data with a paltry increase of just 12,000 jobs in November 2009, the market was up 65 percent — the first six-digit increase in jobs didn’t occur until March 31, 2010, and by that time equities were already up 78 percent.
Our purpose for highlighting the examples above is to illustrate that markets are a discounting mechanism and that inflection points for equities can, and have, occurred well in advance of economic readings improving. As a result, we would strongly caution investors considering timing the market to think twice and contemplate the potential damage their actions could have on their long-term financial plan.
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Wall Street wrap
While we will have to wait until later this week to see if the Federal Reserve’s preferred inflation measure has shown signs of improving, the data out last week continue to shine a light on a lower path forward for price pressures in the coming months.
Further Weakening for Housing: Existing home sales fell for the eighth consecutive month and, with the exception of a brief period at the beginning of COVID, are now selling at the slowest pace since 2012, according to the latest report from the National Association of Realtors. Data for September show sales were down 1.5 percent since August and are off 28 percent from January’s near-record pace of 6.49 million units. Home prices continued a three-month slide, with the median sales price at $384,800, down from the prior month’s level of $389,500 and well off the record high of $413,800 recorded in June. We expect elevated mortgage rates this year will continue to weigh on prices as homeowners with low-interest fixed-rate mortgages opt to stay put instead of trading up and taking out loans with interest rates now topping 7 percent.
Data from the National Association of Home Builders out last week show builders are also feeling a pullback in housing demand. The latest sentiment reading in its Home Builders Index fell to 38 from August’s reading of 46 (readings of 50 or above indicate expansion). By comparison, the index stood at 84 at the beginning of the year. The drop marks the tenth consecutive month of falling sentiment. The growing pessimism is consistent with weakening housing starts data from the U.S. Census Bureau, which shows seasonally adjusted housing starts for September fell 8.1 percent from the prior month. Although multi-family starts fell for the month, they remain well above pre-COVID levels and could point to some welcome relief in rent costs in the months ahead.
More signs of recession risks: The Conference Board’s latest Leading Economic Index (LEI) dropped 0.4 percent in September and is now down 5.6 percent on an annualized basis over the past six months. When announcing the latest reading, Ataman Ozyildirim, Senior Director, Economics, at The Conference Board, noted that LEI’s “persistent downward trajectory in recent months suggests a recession is increasingly likely before year-end.” History supports this view. Every time during the past 63 years that LEI readings have been at the levels we are seeing today, the economy has either been in or on the verge of a recession. We don’t believe inflation will be able to withstand a recession. While we believe a recession is approaching, we continue to believe it will be mild and uneven given the overall financial strength of U.S. consumers, banks and corporations.
The week ahead
Monday: We’ll get an update on the health of manufacturing and services in the U.S. when S&P Global releases its Flash Purchasing Manufacturers Index reports for September. Cost pressures have been easing for manufacturers as inventories have been rebuilt and supply chain bottlenecks have cleared. We will be watching for signs that the trend of ebbing costs is broadening into the services side of the economy.
The Chicago Federal Reserve Bank will release its national activity index. The report provides a look at economic activity across the country as well as related inflationary pressures. This report, along with Tuesday’s release of real-time gross domestic product (GDP) estimate from the Federal Reserve Bank of Atlanta, will provide further insights as to whether the U.S. economy has already entered a recession.
Tuesday: The S&P CoreLogic Case-Shiller index of property values will be out before the opening bell. There has been a marked cooling in home sales and pricing as interest rates have climbed in response to the Fed’s rate hikes. We will be watching for additional signs of flat or declining prices, which should translate to declining inflation readings in the months to come.
The Conference Board’s Consumer Confidence report will come out in the morning. We will be on the lookout for any changes in trends that could steepen the trajectory of softening consumer demand. The report also contains important information on the state of the employment market through its measure of consumers’ opinions as to the ease or difficulty of finding jobs.
Thursday: The Bureau of Economic Analysis will release its estimate of U.S. GDP for the third quarter. Consensus estimates point to the economy rebounding after two consecutive quarters of negative growth.
Friday: The latest PCE price index from the U.S. Commerce Department will be out before the opening bell. This is the preferred measure of inflation used by the Federal Reserve when making rate hike decisions. Investors will be parsing the data to see if it confirms the modest uptick in prices captured by the CPI earlier this month.
The final numbers for the University of Michigan Sentiment survey will be released. Initial readings related to long-term inflation expectations ticked up in the latest preliminary reading. Inflation expectations are an area of focus for the Federal Reserve as it contemplates future rate hikes. We will be watching for any fine-tuning of that reading
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Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
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As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.