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Wait for it… Wait for it…

“To lose patience is to lose the battle.”

Mahatma Gandhi


We live in a world flooded with information, instant analysis and a twenty-four-hour news cycle. Want to find an opinion that supports your view? It’s out there somewhere if you look long enough. This is especially true when it comes to investing where the pundits promote strong views on CNBC, Bloomberg TV and Fox Business, to name a few vocal outlets. In their world there is only Buy and Sell, there is no Hold. They are screaming at you to move, react and take action.

  • Equities react negatively to recessions, and the probability of a recession is rising as the Federal Reserve increases short term borrowing costs.

  • Elevated rates take time to impact the real economy – this is sometimes referred to as the long and variable lags of monetary policy.

  • Jobs tend to be the last domino to fall before a recession is clear, so pay attention to employment indicators.

Our simple and timely message for investors today is to stay patient, tune out the financial media static and listen to the signal being provided by Federal Reserve interest rate policy, the economy and corporate earnings. By clearing up your own personal airwaves you may just create the space patience requires.

Equities React Negatively to Recessions


It’s a simple but profound concept: when corporate earnings decline, stock prices react negatively. History teaches us when the economy slows, corporate earnings (generally) get hit by the combination of slowing revenue and margin compression. For all of the debate and discussion coming from the financial news media, we are definitely not currently in a recession. Demand remains strong, revenue growth is solid and, most importantly, jobs continue to be created.

The Long and Variable Lags of Monetary Policy

Since starting their inflation fighting campaign in March of this year, the US Federal Reserve (Fed) has increased short term interest rates at the fastest pace in history. This Fed is serious about not making the mistakes of the ‘70s and allowing inflation to get imbedded in expectations. Rising interest rates increase borrowing costs, slow rate-sensitive sectors like housing and autos and slow the economy by reducing demand. Rising interest rates cause recessions. But the impact of rising rates take time – the rule of thumb used by many economists is at least six months from rate increase to impact on the economy. As a reminder, the first Fed rate hike was eight months ago.


However, just because the talking heads are screaming about the impact of rising rates on the economy does not indicate we are in a recession, nor does it suggest recent stock price declines are associated with a recession. So far rising rates have impacted more speculative assets – Crypto, SPACs, IPOs and high revenue growth/no free cash flow equities to name a few – but have had limited impact on corporate earnings and for the most part the broader equity market. No recession, no equity market reaction.

Jobs Losses Tend to be the Confirmation of a Recession

Employers work hard to attract labor during an economic expansion and are hesitant to let those workers go until they are certain the economy is slowing. That’s why when you see job losses, a recession is almost a certainty. Job losses are the final indicator that corporate profits are at risk. Job losses are the signal through the noise that investors should watch for if they are concerned about capital preservation. Job losses tend to mark the beginning of the end of the economic cycle.


Stay Patient, Get Rewarded

The point we’re making walking through all of this: as equity investors, it pays to stay patient. By not selling too early you often participate in bull markets where all the pundits are expecting a recession but it does not materialize. By not buying too early you often avoid the capital destruction associated with the recession that actually does materialize. This is particularly important to remember now as the Fed continues to raise short term rates, thereby increasing the risk – but not the certainty – of a recession. Keep it simple, ignore the static and tune into the signal. But most importantly, be patient.


Important Disclosures & Definitions

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. One may not invest directly in an index.

AAI000217 03/31/2024


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