The leveling of inflation on August 10 and the recent drop in the price of gas at the pump aren’t necessarily the bellwethers for an 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.”