I am having more conversations lately with clients who ask….have we hit THE bottom yet. The “nobody knows” is always the answer but doesn’t make for a long conversation. The real point is a different spin… IF one believes we will economically survive long term, and IF one believes this is a cyclical economic adjustment (painful none the least), and IF one believes in the economic system that has survived for 250 years will continue, the short-term bottom is less relevant. Our belief is that we are closer to THE bottom than the next ultimate top. Much closer. Personally, the equity markets have been greatly damaged from the declines and sets up well on an 18 to 24 month look ahead (and beyond). Translated….. money put to work at these levels has a much higher probability of success looking forward. Key point…. As we have said ad nauseum…the equity (stock) markets are THE leading indicator. As we sit today, it has priced in significant interest rate rises to the point of recession. Backing that assumption is the pretty dramatic decline in the 10-year treasury over the past few weeks. Basically, economic slowdown is baked into the cake and asset prices have revalued down to meet the expected realities.
The flip side….Could it get worse…. Of course, but something “new” (and not in a good way) would need to happen moving ahead. In 2008 the real estate debacle led to the other shoes to drop which were mortgage contagion, lender insolvency, and then broad economic slowdown. While not in our base case, another leg down is not out of the question. If one believes the markets will drop significantly further, they are banking on the belief that something worse will pop up in the future. We don’t share that outlook but don’t dismiss it as impossible.
Understanding nobody really really knows, and each economic cycle is different, what is a reasonable belief. Looking at a middle of the road thesis (not too hot…not too cold) we will call our “base case”. Point to remember, in the short term the data doesn’t have to get better to begin the mend, it just has to not get worse. With a lot of bad priced in, sooner than later it will get “less worse”…. From that point markets will recover and begin a new Bull Cycle when “the market” sees the turning point. Typically, long before the public and the media pick up on the facts. A market bounce become a rising market and the money that missed out will flood back in at higher levels. Traditionally, inflation happens, followed by tightening monetary policy, followed by economic slowdown, followed by loosening anew of monetary policy, followed by economic growth. In my 25 years of doing this, that has normally been the pattern. Feels that way again, but that’s one man’s opinion.
As we have written, and hasn’t changed, our outlook is moderate overweight to equity, and we are adding on pull backs. Not crazy and all within risk tolerance but doing our job. Also, added some duration to the fixed income sleeve and adjusting that side of the portfolios as well. While all of the “talking heads” are waxing about bottoms and where we are, we prefer to be looking ahead at where we will be. As always, don’t hesitate to reach out for anything. Enjoy your summer.
Ed, Frank, Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
Cell: 610-745-1931
stilesed@retire-me.com
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