Rolling Recession
The phrase rolling recession is relatively new in economics, but it’s gaining popularity. The U.S. has been experiencing a rolling recession over the last few years that could continue but not an economy-wide one. If you think back to last year, some parts of the economy were in a very deep recession, but it didn’t spread economically. Areas like San Francisco and New York have had a deep real estate recession, and sectors like the technology sector experienced a recession last year. These areas may be coming out of it, but we’re seeing a rolling recession, and new parts of the economy seem to be weakening. Last year, housing was weak, but new housing construction, so far this year, has been very strong. However, commercial real estate is weakening, so it’s not an economic-wide slowdown. It appears to be rolling across the country, where there’s much strength. In areas like Florida and Texas, real estate prices and commercial real estate are strong, but if you look at places like New York, where 40% of the central business district office buildings are, it’s very weak. This is an interestingly new concept where we may not see an economic-wide slowdown, which is more challenging for economists to factor in and project, but we may see it in specific sectors. A good way to look at that and what calls for the discussion is that earning season is coming up. Earnings look backward to where things were last quarter. What fascinated us that you can see in a chart shown in this episode is that revenues are expected to decline by 0.8%. Earnings are expected to climb by 6.4%. The fact that revenue is declining is more interesting to us because, in an inflationary environment, you would expect prices to go up with inflation and earnings to be harmed as prices don’t outpace cost expansion. However, in this scenario, revenues are declining, but it’s not economic-wide. Specific sectors, like financials and consumer discretionary, are growing in revenue. Certain sectors like energy and materials, which were booming last year, are seeing revenue decline. These may be areas of weakness, which we saw in prices for the first half of the year, and could be up like last year’s for the second half. This shows a picture of possible rolling weakness. Many people might be surprised to see financials on the list, but again, this is the S&P 500, the largest 500 stocks. The financials may be misleading because many regional banks aren’t included. A point that we brought up on a previous vlog is that JP Morgan, at that point, was larger than all the regional banks combined, so this is the biggest of the bigs and something to keep in mind. Another point to make when looking at S&P 500 earnings is the size impact. What’s fascinating is that the top ten companies make up 30% of the index and 20% of the earnings. It’s been a narrowly focused stock market rally this year. In some particular companies, those rallies may have outrun their earnings. We’ve seen prices move much quicker than earnings, so there may be some pullback, and it is something we’re watching. We will be using this data to look backward to help us make decisions going forward.
Historical Market Data
The second half of the year is starting relatively slowly as the market battles overbought conditions. A rise in interest rates and economic resiliency, especially the tight labor market, has kept the Federal Reserve rate hikes on the table. This has led to more uncertainty in the market for the second half of the year. We want to look at what history says about the second half of a year that started well. It was great to see the market up in the first half, but the breadth of the overall market could have been stronger. Only a few stocks contributed to much of the market’s upside. We did some correlation analysis, comparing the first half of prior years to 2023, and found that history is on the market’s side. The ten highest correlated first half to 2023, going back to 1950, the S&P 500 generated average and median gains of around 12% in the second half. Nine out of ten periods produced positive returns. 1995 stands out with a high correlation to 2023 and a relatively similar macroeconomic backdrop to now. We saw market volatility in 1994, especially in the bond market, as we did in 2022. The following year, 1995, was also a pre-election year when the Fed paused an aggressive rate hiking cycle. The soft landing helped drive the S&P 500 up 13.1% in the year’s second half. Of course, no guarantees, but this observational data comes from a lot of historical data and has a major asterisk by it. The correlation does not always apply causation, and the same returns. Still, we continue to look at historical trends to see if similar market setups can contribute to our investment strategy for our clients.
The Bond Market
The bond market might not be as fun to track as the stock market, but it is massive compared to the stock market, so it is very important in our research. Yields on the 10-year and 30-year bonds exploded last week to join the rest of the yield curve. The 10-year is at 4.05%, with the 30-year around the same mark. One interesting fact we’ve been tracking for the last few weeks is the 10-year and the 30-year. They’ve both finally broken out of the ranges that they have been at. The new target for the 10-year is 4.35%. It is currently at 4.05%, so the target is another 30 basis points to the upside. We don’t have a target for the 30-year, but we are expecting it to be close to the same as the 10-year target. How does this impact you, the consumer? Mortgage rates are elevated and will most likely stay that way. With yields for treasuries going up, that will result in still higher mortgage rates, which are at a 6.81% national average and will continue to stay elevated. Another way consumers will feel the impact is when bond yields rise, bond prices fall. This is something to monitor continually. Also, the Fed’s rate hike decision is coming up at the end of the month. The Fed paused rate hikes in June. Was it a pause or just a skip? We know from research that there’s about a 92% chance of the Fed raising rates at the end of July. So, it appears this was more of a skip than a pause. July is looking like it is firmly on the table for another 25-point base hike. We will keep an eye on this to see what the Fed does from here with the employment numbers and the yields being the way they are.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Ty Miller
Associate Vice President
Wealth Consultant
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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