Is this time finally DIFFERENT? Warning bells should sound in your head!
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Wednesday: The Independent Investor |
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We’re excited to share with you another important insight about investing. Each Wednesday, we talk about these topics because our aim is to help you achieve financial stability in the long run. Ready for today’s investing advice? Keep reading below to learn more.
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Is this time finally DIFFERENT? Warning bells should sound in your head! In August 2023, Valens Research’s Director of Research Robert Spivey delivered a coaching comment to the workforce at Valens Research. He said investors are quick to cast aside their fears. Why did he say that? Let’s backtrack a little bit… In February 2023, Northwestern Mutual Wealth Management Chief Investment Officer Brent Schutte got in front of a camera and cried out the mantra that explains a lot of the market’s optimism: “I can’t remember a more well-telegraphed recession.” Schutte believed investors had already priced in any risk of a downturn, since everyone was expecting one. He implied that when everyone is expecting a recession, that’s exactly when there won’t be one. Many pointed to artificial-intelligence (AI) mania as the core driver of the stock market in 2023… but there was a clear shift long after that started in late May 2023 and early June 2023. Inflation began to show signs of calming, and investors became more confident in the idea of a “soft landing.” Many thought the Federal Reserve could scale down inflation without a recession ever happening. [Soft Landing: This refers to the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn.] That potential sent the entire market higher through early August 2023. It wasn’t just the “Big Six” AI firms rallying. The Russell 2000 small-cap index also rose 14% from the end of May 2023 to the end of July 2023. Back then, the market was laughing in the face of the most well-telegraphed recession ever. It looked like that time was finally different. Here’s the thing: Any investor worth their salt should know NOT to fall into that trap. According to Spivey, people are eager to believe that recession fear is subsiding. They want to think they’ve already survived the worst of the market’s wrath. However, as we’ll explain today, it’s not a foregone conclusion… there’s likely plenty more pain ahead for investors.
A Lesson Learned or A Lesson Burned? Spivey says it doesn’t matter how many economic crises we survive. Some folks just don’t learn their lesson. That’s why, only a week before the recent market peak, he and his team laughed when they saw a tweet highlighting a January 2008 Wall Street Journal quote: “It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.” Spivey says when you read headlines like that from right before the Great Recession, warning bells should sound in your head. Maybe this time isn’t that different after all. That’s exactly what the credit markets—and specifically the fed-funds futures market—are warning. The fed-funds futures market is where big-money investors go to hedge their credit risk. These are highly liquid markets where more than USD 500 billion in notional value trades in any given day. Basically, this isn’t a place where casual bettors can push the market around. So, when you see extreme signals from them, it’s a surefire sign that deep-pocketed investors are telling the market something. The fed-funds futures market predicted that the Fed would have to cut interest rates by 150 basis points (bps) by 2024. Meanwhile, the market bet that the Fed’s target rate will drop from a range of 525 to 550 bps, to a range of 375 to 400 bps. Remember: The Fed lowers interest rates when it needs to stimulate the economy. If the economy has a soft landing, the central bank is going to be much slower to lower rates. There are only significant cuts during recessions when the economy desperately needs the Fed to step in and encourage spending. That’s why if you want a reliable recession signal, the last place you’d look at is the equity markets. The credit markets are always better at forecasting risk. Over the next few quarters, credit markets will remain tight and companies will continue struggling to refinance. As a result, Spivey and his team keep reminding investors to be cautious and patient when investing in the current environment. Hope you’ve found this week’s insights interesting and helpful. Surfing is a sport that requires a great deal of practice, lots of physical exertion, and more importantly, lots of patience. Learn more about why you need to have a great deal of patience in investing in next week’s article! |
