Mind on Money: Navigating weird financial times

Mind on Money: Navigating weird financial times

When it comes to financial markets, in my opinion there are good times, there are bad times and then there are “weird” times, which of course I think are the most complicated.

Statistically, in the United States, from the time period from 1926 to 2019 (93 years), the stock market was in a generally rising bull market 84% (79 years) of the time. The remaining 26% of the time, the stock market was in a generally declining bear market (source: First Trust complied from Bloomberg data).

If life were easy, we could all just comfortably throw our money in the stock market and sleep well at night. Unfortunately, nothing ever seems to be that easy, and while a bull market has the capacity to make us feel like a financial genius, bear markets sometimes have even more power to drive us toward bad investment decision-making. It is the possibility of this poor investment decision-making which makes investing in general a perilous pursuit, and makes the aforementioned “weird” times extremely important to investment strategy.

Weird times to me are depicted as market periods when bad economic news is perceived positively by investors and good economic news is often disregarded or even resisted. I can recall about half a dozen weird periods in my career, and in each the market and economy were experiencing a transition from one economic cycle to another. The ones that easily come to mind are most of 1995, the end of 1999, 2002 and 2007 — all periods I would fit into this category. Since the 2008-2009 financial crisis, however, weird has become much more common as investors became addicted to the easy money polices of the Federal Reserve, which are primarily driven by a weakening economic environment or periods of market stress.

Perhaps the weirdest of the weird times was late March and April of 2020 at the deepest point of the COVID crisis, and at the threshold of the most aggressive easy money policies in modern history. I can recall negative interest rates in Europe, negative oil prices and a booming stock market. Strange times indeed.

I believe 2023 is likely to be a weird year for markets. While 2021 was dominated by the sugar high of the Fed’s easy money polices, and 2022 was dominated by the inflationary hangover from the 2021 monetary binge, I think 2023 is going to have a hard time figuring out what kind of market it wants to be.

My gut tells me the obsession with inflation, and in actuality the obsession with the Fed’s interest rate policy response to inflation, will begin to fade away and quickly morph into a new obsession with the likelihood of recession as we progress through the year. If this transition occurs, the coins will flip as a focus on data points like employment levels and wage growth, both seen as negative in an inflation-obsessed environment, will give way to a focus on layoffs and unemployment, which will then be perceived as a sign of recession.

As we progress through the year, it will be important for investors to keep in mind which indicators can serve as early signs of recession, and which are likely only to flash danger after the beast is in the room. As this process progresses, investors and consumers wanting to make timely quality decisions may find themselves needing to pay consistent attention to a few more obscure economic indicators, while understanding some higher profile financial news items may not provide the insight they appear to provide.

So, what am I watching in this context? The canaries in this coal mine for me will be retail sales, durable goods orders, housing starts and existing home sales, and to a lesser extent consumer confidence. I would add to this the stock market itself and interest rates in the form of the yield curve, but these indicators are already so convoluted right now, in my opinion, they have ceased to be overly useful.

If these more obscure metrics are getting my focus, at the same time I think those waiting for the unemployment rate to drop and GDP (the measure of all economic activity) to decline are going to find themselves driving through the rear view mirror. In addition, I think those who continue to focus on the inflation rate as a decision-making tool, are going to find themselves fighting yesterday’s battles in fairly short order, as this trend starts to drop off the radar of relevance.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.

Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.