The leveling of inflation on August 10 and the recent drop in the price of gas at the pump aren’t necessarily bellwethers for the economic soft-landing many financial advisors would love to see, but they certainly have eased anxieties, at least for now.
“We had one of the worst starts of a year, and in everything, not just equities. Stocks down a lot, and bonds giving no security. Most investors have been the most pessimistic they’ve been since 2009, even more so than during the pandemic,” says Ryan Detrick, chief market strategist at Carson Group in Omaha, Neb. “But now we’ve had a pretty solid earnings season. There’s been a massive drop in commodities, peak inflation seems to be here, and there’s an extremely strong jobs employment backdrop. If we avoid recession, we could have a pretty good time.”
“Pessimism heading into the earnings cycle was very high, some of the most bearish positioning we’ve seen,” agrees David Grecsek, managing director in investment strategy and research at Aspiriant, headquartered in Los Angeles. “Our take on things now is it’s great to have had a rally and clear some of that pessimism out.”
“I’m feeling more relaxed that the inflation numbers seem to be on the right path,” adds Jason Blackwell, chief investment strategist at Boston’s Colony Group. “However, one month doesn’t a trend make.”
As these investment advisors and others wait to see what happens next with inflation, with the Fed, with employment and possible recession, they say they’re crunching historical data for clues to some of the possibilities for future trends and making small adjustments to their portfolios.
Detrick, for example, looks to midterm election trends going back to World War II for signs that more good news is on the horizon. “Historically, midterm years are quite volatile. The largest pullback was 17%, peak to trough, and we knew that coming in to 2022,” he says.
But the bounce-backs have been equally thrilling. “The first three quarters aren’t so easy. But once you get to the midterm election and you go one year out, we’ve been up as much as 26%, and two quarters out, up 15%,” he continues.
With that in mind, Detrick says he’s remaining neutral right now in tech and following up on his focus earlier this year in healthcare, energy and materials with more investment. “We tilted value over growth,” he says. “And maybe a mild recession wouldn’t be so bad, like in 1990 when we were out of it before we knew we were in it.”
The real wildcard in Detrick’s mind, he says, is what will happen with Taiwan and China, since the invasion of Ukraine by Russia is already priced into the markets.
“An 82-year-old woman just went over there, and you saw what they did in response,” he says of China’s war games display in reaction to House Speaker Nancy Pelosi’s diplomatic visit to Taiwan.
Stephanie Link, head of the investment solutions group at Chicago’s Hightower, is the portfolio manager for the firm’s large-cap core portfolio, which she describes as growth at a reasonable price, or a blend of value and growth.
Like Detrick’s, her portfolio has been tipped toward value this year, and like Detrick she believes the financial industry is looking at a rapid slowdown right now.
But she does not see a soft landing in the future.
Between now and the end of the year, Link says she expects consumers to do well as wages and jobs remain strong. They may even feel optimistic about the economy, especially if food prices come down a bit, she says.
“But will the Fed engineer a soft landing? I doubt it. They have a terrible track record. There have been soft landings just 10% of the time when they’ve been raising interest rates,” she says.
Right now Link says she likes investing in industrials, materials and discretionary sectors, at least through December. And she’s overweight in financials, but it’s part of her tilt toward value—and not part of a “not-recession soft landing.”
“And then I’ll see,” she says. “Between now and the end of the year can be an eternity.”
A Hard Landing Most Likely Ahead
Since the Fed is clearly continuing in its pursuit to beat down inflation, advisors say, it will be left to investment professionals to get ahead of the looming recession story.
“Inflation was the strongest risk factor coming into this year,” Blackwell says. “And as we look at the inflation numbers now, it’s really telling a story that we expected.
“A lot of our conversations this year have been deconstructing the GDP number,” he says. “When we look at the real number, the net number that’s growth minus inflation, growth is very robust.”
With that in mind, he has strongly dedicated his investments to real assets and inflation-sensitive assets, like real estate, infrastructure and commodities, he says, adding that he just introduced a high-dividend equity exposure that bumped up dividends and gave clients a value tilt.
“Right now we’re aggressively core, and pretty optimistic over the next 24 months, though it’s sort of an awkward world we’re living in where big numbers are punished and small numbers are celebrated,” he says of the inclination to avoid big swings by being satisfied with more modest, but steady, results.
But there could be tacks in the road, thanks to the Fed doing its yeoman’s work against inflation. “Did they go too far?” Blackwell asks. “We’ll know in six to nine months.”
Grecsek and other professional investors worry more about the Fed overtightening than the folks strolling Main Street.
“We are seeing wage pressures elevated, and that’s not good news,” he says. “We always acknowledged the [two-year U.S. treasury note and the 10-year note] were inverted earlier in the year, but now they’re unambiguously inverted. … The odds of a Fed pivot is low, the odds of a soft landing is low, and the risk of recession is high.”
Grecsek says he used the market pullback earlier this year to upgrade the quality of investments across the board.
“And with a horizon of six to 12 years, now is an interesting time to be thinking of Europe,” he continues. “In five years, what’s happening in Europe now will make it a stronger place, not weaker. They’ll have a stronger-knit community and a greater NATO presence. But it’s going to be volatile on the way there.”
Like other investment professionals, he’s been leaning away from tech and growth domestically and more toward value, with healthcare and consumer staples front of mind.
When Clients Worry, Listen
“Recession may or may not be happening, but it doesn’t matter a ton because people and the market are thinking it’s here or coming,” says Chad Carlson, a CFP and president and chief investment officer at BDF Private Wealth in Itasca, Ill.
“We all know the academic answer of what to do in downturns, but we need to have the patience to listen to the concerns of clients,” Carlson says. “We have to say, ‘Yes, we see that, and here’s how it’s expressed in your portfolio.’”
This was the strategy he says he used in handling client phone calls over inflation concerns, especially with recently retired clients, he says.
“We’d turn that question around. Where do they think inflation will be in five years, 10 years? And we’d remind them that their projection is for the next 30 years,” he says. “Once you get them there, they say, ‘Oh, I don’t think it’ll be like this in five years. It’s temporary.’”
It’s the same with recession.
“Most of the time, clients are focused on the issue that’s in the front-page headline. If a median recession is a 20% decline, we just had that but bounced back,” he says. “So it’ll have to be worse than that and not bounce back.”
In 2009, one network news channels notably ran a story on how to effectively use Hamburger Helper to make ends meet, and Carlson says that kind of behavior often aligns with a turning point.
“There’s capitulation, the ‘Hamburger Helper moment,’” he says. “Then it starts to get better from there. The markets decided it’s enough. We’ve seen that repeatedly.”
While not even close by financial apocalypse standards, that same channel is already producing segments on how to save money by canceling subscriptions, truly enjoying staycations for $30 a day and finding roommates.
So maybe there will be a soft landing after all.