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  • Tessa MacDonald

The BIG Report: July 2023

The BIG Report: July 2023

You may have heard the saying “Even a broken clock is right twice a day.” The same could be said for what our industry calls “perma bears or perma bulls.” These are folks that are always adamant that the market is either going to go up or adamant that it’s going to go down. Both opinions will eventually be right but waiting for that day to come can be extremely expensive if you’re an investor. This is why we try to maintain an open mind about what the market may or may not do and not become dogmatic about any one point of view.

2023 is a classic example. We, like most professionals in the industry came into this year expecting with near certainty that a recession was coming and the market was headed lower. There were and continue to be plenty of reasons to worry about what lies ahead for the economy and therefore the stock market. The lingering Russia/Ukraine war, tensions with China, U.S. debt levels, elevated inflation, and rates at the highest levels they’ve been in almost 20 years after the most aggressive rate hiking cycle in U.S. history. On top of that, the COVID money sloshing around in our economy is dwindling as consumer credit usage has exploded suggesting that consumers may be getting stretched. Many of the “economic indicators” continue to show warning signs of a recession.

Well... all of that might be quite true but there’s nothing recessionary about this economy at the moment. Will that continue? It doesn’t seem logical but I learned a long time ago that the markets and economy don’t necessarily follow what seems logical.

This is why we don’t just make all of our investment allocation decisions based on fundamental economic data and instead rely on a combination of fundamental and technical data to guide us. As we mentioned in our last newsletter, the market technicals were extremely compelling and as such, we made significant changes in March to be better positioned to make money in a market that might continue to climb in spite of all of the negativity. I’m glad we did because the market has done just that.

The market rise hasn’t fully quelled the chorus of naysayers that are still insisting that the logical scenario will still unfold and the market will head lower. There’s no shortage of permabears on CNBC every day making these claims and in large part they are really hoping for a decline because they’ve missed out on a significant portion of this year’s gains.

In the very short term they may get their chance. At the moment, the market is looking a

bit extended to the upside. Corporate earnings expectations are still declining but at a slower rate. The key word there is “declining”. The stock market cares about earnings and not the earnings reported today but what’s expected for the upcoming quarter and beyond. Additionally, we are entering into the weakest period of the year seasonally speaking. August and September are traditionally two of the worst months of the year. In light of this, we have been raising cash in recent weeks by trimming profits from our largest gaining stocks. If the market does pull back, we can take that opportunity to do some buying and add money back to the market at a lower level.

As for the longer term outlook, I have to admit, I am just as baffled that the market has gone up so much this year for the same reasons as the naysayers. The only difference being that we didn’t sit on the sidelines insisting that our expectations were the only way forward. The naysayers on the other hand keep pushing their dire warnings back 3 to 6 months at a time. The good news for them is that if they just keep at it, they will eventually be right! It might be five years from now but they WILL be right someday!

It’s common knowledge that the market has a tendency to lead the economy by 6 to 9 months. It will usually decline significantly 6 to 9 months prior to a recession and start to rebound long before the recession is over. Most professionals view this as the market being predictive of recessions and rebounds but they might have it wrong. It could be the cause. When the market falls significantly, people feel poorer. They tend to batten down the hatches and become more sensitive to spending. When the market moves significantly higher, they tend to feel better and more comfortable spending.

This incredible rise in the market since October might actually help ward off a recession due to better household economics of investors. The labor market also continues to be extremely strong and it’s very hard to envision a recession with a labor market as strong as the one we have now.

Even so, the threat of recession and a stock market decline will loom over us because of things that have happened in the past. When certain economic indicators have been at the levels they are now, we’ve always had a recession shortly thereafter. This is looking like it could be the first time it doesn’t happen, but we can’t discount the possibility just yet no matter how high the market climbs. As such, we will continue to keep an allocation to bonds for protection. The interest we can earn is better than it has been in years and after last year’s historic bond market decline, bonds look much more attractive with little downside risk. Maintaining a more balanced approach will allow for flexibility moving forward.

In closing, the market has made a bold statement that the worst is behind us and based on the research we’ve done, we believe it is likely telling the truth. Even if that’s the case, markets don’t go up in a straight line and we expect some normal volatility maybe as soon as the next couple of months. We welcome any correction as an opportunity to do some buying because we think the market is likely to have a strong finish to the year. That said, all of those pundits that insist that a recession is coming and the market is going to crash, are correct. A recession is coming and the market will crash just as sure my broken watch that shows a date of April 11th will be right again on April 11th next year. The only difference between the insistent naysayers and my watch is that the naysayers don’t know when they’ll be right once again. I hope it’s not any time soon but we’ll be ready just in case.

We appreciate your trust and confidence. Please continue to listen to our weekly podcasts by asking Siri, Google or Alexa to “play the latest episode of the Big Money Report podcast”. Or listen through our website or follow us on Facebook for the latest news and updates to the market and your money.

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