We have so many conflicting data points out there right now. Several measures indicate we are either in or pending a recession while others, like truck tonnage below signal expansion. I think we are one key Fed interest rate/easing or Congressional spending decision away from flipping this in either direction.
This isn’t an election year so I skeptical anything dramatic happens on the easing front least until late summer. It tends to leave on with an optimistic outlook but one with plenty of reservations.
Q4 2022 hedge fund letters, conferences and more
“Davidson” submits:
Markets operate on shifting narratives. But, the headlines of monthly reports are without context other than was it in line or better/worse than expected. Being that the media is concerned with the short-term i.e., the next 30sec or so, discussion of context receives little on-air time. Longer-term trends which carry broader context are what is needed to supply information investors require. The recent monthly declines in Retail Sales and Trucking Tonnage, called recession signals by traders, carry different meaning for long-term investors.
Two charts, Retail Sales vs. Trucking Tonnage Index from 2000 and Business Inventory/Sales… from 1992, are sufficiently long to supply context. The first observation is that Retail Sales have not tumbled as many claim but are holding at a relatively high level post-COVID. This represents surprising continued consumer strength when a return to trend is typical. If one looks at the current trend for Trucking Tonnage, one sees a surge just prior to 2022’s holiday period but a longer-term return to trend pre-COVID. Neither of these economic indicators is signaling recession. The Retail Sales surge during COVID reflected consumer at-home needs which have since changed post-COVID. Economic reopening results in disappointing sales of the favored-COVID issues in recent months and subsequent share price declines. Spending has shifted and now is reflected in the rise of leisure travel (air passenger traffic), vehicle and aircraft sales and etc which are associated with a reopening economy. Job Openings and total gains in employment continue to support the reopening trend.
Supporting this narrative is the Business Inventory/Sales… data. Manufacturing and Retail inventories saw severe disruption during COVID. Inventories at specific levels are required for efficient operation for specific businesses. They are gradually returning to pre-COVID levels with Retail closer to normalization than Manufacturing which yet has supply chain issues and inventory imbalances. Vehicle and aircraft manufacturing stand as good examples of having higher unfinished inventories awaiting key components. The trends in the economic data indicate that issues are resolving and enough economic demand remains to continue rising trends in employment and personal income.
COVID has been extraordinarily disruptive but continued recovery post-COVID remains intact in this data. The fear that dips in various monthly data signal recession is not supported by the longer perspective. The better strategy at this time is to invest for continued economic normalization and importantly to avoid the COVID-favorites as overvalued. With rates likely to rise on continued inflation fear, it is better to avoid commitments to longer dated fixed income.
Best advice currently:
- Buy industrials
- Avoid longer dated fixed income
- Avoid COVID favorites
