Musk Echoes Recession Fears by the Fed
What is it?
Some federal reserve members recently announced that there may be a “mild recession later this year”.* Elon Musk mentioned that “The US economy probably faces a hard slog for the next year as higher interest rates and other headwinds weigh on growth.”*
Musk is not alone in this viewpoint and he later points out that “Fed Chair Jerome Powell and his colleagues are too busy looking in the “rearview mirror” — focusing on lagging economic data — to realize the inflation threat has faded and the economy is cooling fast.”*
Why does it matter?
Even with pessimism by Musk and some Fed officials, markets remain stable as earnings season continues. However, there are some big banks to report this week which will be examined with a critical eye.
We see the current market environment as overly optimistic. There is a lot going on that could cause a deeper recession which could send stocks much lower. With interest rates remaining high, consumers may need to dig into their savings or sell assets to cover the debt obligations that they have taken on in recent years.
Navigating the Possible Downturn
What is it?
While some experts say that the Stock Market is a forward looking indicator of the economy, that is not always the case. In a recent article by Schroders Capital CIO, Dr. Nils Rode wrote “After the significant bankruptcies during the recessions of 2001 and 2008, it took an additional year for equity markets to hit bottom. Therefore, we believe that the recent banking failures may not necessarily indicate the end of the current economic downturn.”**
Why does it matter?
If that is the case this time around then we may be best suited keeping a low exposure to the common investments such as a broad ETF. Rode continued saying “In the current economic climate, we recommend that investors direct their new investments towards assets that align with long-term trends and exhibit low correlation with traditional investment strategies. Additionally, investors could consider cyclical or contrarian investment opportunities for tactical adjustments to their asset allocation, while avoiding investments that may be exposed to cyclical headwinds.”**
We take a cyclical approach to many of our tactical investment models which aims to avoid the downturn of those cyclical ebbs and flows in different sectors of the market. And our investments are taken with the long term in mind. Rode recommended not investing in the broad ETFs but rather in securities that could appreciate in value if the markets go down. We have some of those positions currently and more that we can add to as we see opportunities. Lastly, we have some positions that were bought into using a contrarian investment opportunity as some securities were oversold and we bought into them even though they did not have a strong up trend. Those may be held for the long term or sold as things change in the price for better or worse.
Other articles we found interesting this week:
Current 401(k) portfolio
Our last 401(k) portfolio reallocation: 5/19/2022.
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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
*Zinya Salfiti. “Elon Musk predicts a hard slog for the US economy over the next year as recession fears mount”. 4/13/23. Business Insider https://markets.businessinsider.com/news/stocks/elon-musk-us-recession-tough-sledding-economy-inflation-federal-reserve-2023-4
**Dr. Nils Rode. “Private assets views Q2 2023 – Navigating the downturn”. 4/13/2023. Schroders. https://www.schroders.com/en-us/us/intermediary/insights/private-assets-views-q2-2023—navigating-the-downturn/
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