Putting Market Action into Perspective
We wish everyone and their families a very Happy Thanksgiving and we wanted to touch base before the end of year activities get in full swing.
In future newsletters, we will spend more time on other consequential planning issues, such as Long Term Care planning and taxes, and not just the markets.
However, having a framework of how to think about the economy and markets for the next couple of quarters could be helpful from a behavioral economics (i.e. psychological) perspective. Oftentimes, the financial media likes to swing from headline to headline (which can be dizzying) without taking a step back and having a systematic way to think about what might otherwise be viewed as unrelated data points.
The context is that we have experienced historically high inflation and a slowing economy. More recently, we have seen data points indicating decelerating inflation (very welcome news for the markets, long term bonds and the economy).
Notwithstanding the moderate deceleration in inflation, the consensus of economists is that we will enter a mild recession in 2023. Very briefly, interest rates have done something that almost always signals a looming recession, which is that short term interest rates have climbed higher than long term rates (i.e. they inverted).
Whenever yield curves invert to the extent they are today, it almost always precipitates a recession. In other words, it would be historically unique for the yield curves to be this inverted and not enter a recession (though it could very possibly be a mild recession). Also, the impact from the Federal Reserve’s interest rate hikes (and quantitative tightening) are generally not felt for 6 - 12 - 18 months as monetary policy has a long lagged effect, so much of that impact is still to come.
That is the framework and the context. Now we can use that to develop a view and block out the noise. It is worth noting, we had a July market rally and an October/November rally and much of the financial media talked as if the bear market was over and a new bull market had begun. They were wrong in July and they very well could be wrong now. The intermediate term trend of the market is still bearish. We are still below the 200 day moving average (key long term trend). And while the markets are forward looking machines, they don't bottom prior to the onset of a recession, even though they usually bottom before the recession is over. So this bear market rally may continue and we may even be positive for the quarter, but we think it needs to be seen in this light, which is that this rally is a bear market rally until proven otherwise.
A key reason why we wanted to send out this note is to help each of you mentally be prepared for the probability of more tough slogging ahead (for a couple more quarters), even if this year closes out well and to encourage you to discount some of the headlines you may see in the financial media.
So keep your heads up and enjoy the holidays and your families. Business and market cycles are a part of life, but the longer terms trends are from the lower left to the upper right (i.e. the trend is up). And even now we see encouraging green shoots with some of the inflation numbers beginning to come down, which is very important for a new period of economic expansion and positive returns in the markets.
Meridian Financial Advisory
 Yield Curve Inversion. The 10 Year / 3 Month curve and the 10 Year / 2 Year curve are both highly inverted. These are most reliably predictive yield curves concerning the future of the economy. The slope of the yield curve is a leading economic indicator and when it inverts it usually signals a recession in the future.  The official headline inflation numbers have trailed some of the more forward looking and current measures. The official inflation numbers given in the news (CPI-U: Consumer Price Index-Urban Consumers) are very backward looking (and the headline reported number is a year over year y/y figure) and even it showed less inflation in October than expected and less than the previous month (September). In other words, it is not where we want it to be, but it is trending in the right direction. Furthermore, even if we use the backward looking CPI, but do so on a month to month m/m basis, which is more current than y/y, the data are more encouraging.
Joshua Henry is the founder and Managing Principal of Meridian Financial Advisory, an independent, fee-based wealth management company located in South Carolina, serving people locally and across the country. Meridian focuses on providing wealth management solutions primarily to affluent individuals over age 50 and their families. Joshua is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Joshua is a CERTIFIED FINANCIAL PLANNER™(CFP®), a Certified Investment Management Analyst® (CIMA®) Professional, and earned a Bachelor of Arts degree in Political Science from Cedarville University and a Master of Business Administration degree with a concentration in Corporate Finance from Salve Regina University. The courses for the Corporate Finance concentration were taken from the Kelley School of Business at Indiana University. He has held workshops on Social Security Claiming Strategies, IRA Planning, and Career Coaching for Executives in between jobs. Josh has also taught finance at the university level. When he’s not working, Josh teaches adult Sunday School at his church in Pawley Island, SC. He enjoys traveling, reading, and time with his family. To learn more about Josh, connect with him on LinkedIn.