July 21, 2022

Opinions Matter

     Although I don’t always agree, in my customary tendency towards skepticism, with the investment community burdened with opinions over beliefs, I always prefer the former over the latter. To note put, I prefer to own my predictive strategies then simply share them with the beliefs of others. I bring this up because converging views on every uncertainty from inflation to recession, to Covid and war in Ukraine, sharing a belief is too easy, especially when so much is at stake. The broad indexes have been moving impulsively, as opposed to decisively, higher this week and I’m beginning to have the opinion that uncertainties are being diluted into a less relevant distraction. Point of note, I never shy away from being skeptical even of my own opinions. So, what are they?

    The current economic state has been uneven to say the least, that is until a new twist came in today. The Department of Labor (DOL) released the weekly data tracking Unemployment Claims, and the number showed a small increase. This has followed similar increases since April, and with plenty of slack to move higher, what would be the trigger? The technology companies have been especially vocal in the freezes on new hires. Huge names such as Apple (AAPL), Alphabet (GOOGL) Tesla (TSLA) and Meta (FB) all point to tightening Fed policy and concerns regarding recession. Actual layoffs off are occurring as well, but that’s where the numbers are small compared to past action by corporations looking to reduce operating expenses on their balance sheets, thereby increasing their net profit and staying in the good graces of the street analysts. All of this will come into better focus when the Employment data for July is released on Friday August 5th. Earlier in the week further data showing declines in both Existing Sales and New Housing Starts is often seen as the result of higher interest rates. In my opinion, rates, even at current levels are still historically low and have room to move even higher. My technical trigger on rates going higher is when the 10yr Treasury, currently at 2.94%, breaks 4.25%. Unlikely, but not impossible.

    As for company data, the earnings season has begun and with the exception of the banks, are showing reasonable returns while at the same time all are providing cautious guidance into the rest of the year. My strategy will continue to be guided less by the depth of the current signs of economic slowdown but more on how companies are prevailing. If earnings hold up despite inflation, it will have a positive impact on stock prices as we begin moving into the fall. But if earnings estimates prove too high, analysts will likely lower estimates, which in line will lower investor sentiment, not suggesting a new low, but more likely an increase in negative volatility. 

    The stock market is predictive, which is why stock prices tend to begin a new upward cycle during a recession, before it ends. That’s why, in my opinion, watching the economy is more important than the uncertainties we have little control over, and less information coming from those in power. But those uncertainties can’t be entirely ignored and therefor, maintaining room for new opportunities still makes sense, especially if the more certain outcome is also short lived, as uncertainties usually end.

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