Quick Bites | Contradictory signals: It’s what makes markets
November 28th, 2023 | Article
By: Paul Zwi
Investment markets are so complex and nuanced that it is very easy to find contradictory information that supports either buying or selling at any given time. That’s why experience, sorting out the noise from the valuable analyses, and keeping a wary eye on the key lasting trends that tend to move markets over time are so important.
Here’s a typical example: the likelihood of recession in the US. The first chart below shows the number of times that recession was mentioned during recent earnings calls in the quarterly reporting season by S&P 500 companies. It shows that recession was a big concern back in Q2 of 2022, when 46% of companies raised the issue. This has now fallen to only 11% in Q3 of 2023, and the decline is clear and unambiguous, a fact that has added to the surge in markets over the last 4 weeks.
Source: FactSet, Moelis
The emerging consensus amongst US economists: recession forecasts have mostly been pulled, businesses are hiring, consumers are spending, output is growing. Yet one important indicator is still flashing a red light warning signal. The Conference Board’s Leading Economic Index (LEI) in October fell 0.8% from the prior month, its 19th straight decline. The LEI aggregates a handful of different indicators – such as jobless claims, building permits and interest rate spreads – to decipher economic turning points. What does the group that built it think? “The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending—due to depleting pandemic saving and mandatory student loan repayments—to tip the U.S. economy into a very short recession.”
Source: The Conference Board, Wall Street Journal
Perhaps the key message there is “very short recession”. Is there too much contradictory information out there? What should guide one’s investment decisions? All pertinent important questions. As one who reads a lot of it, believe me when I say that one can find credible, well researched and credentialled information for diametrically opposite market narratives on a daily basis. For the record, while we all know predicting the future is a mug’s game, we remain confident that the outlook for long term investment in quality equities looks bright for a good year in 2024.
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Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance is not a reliable indicator of future performance.