Keeping it All in Perspective

In times like these, it’s important to take a step back and keep things in perspective

With the market selloff leading into the weekend, it’s become harder and harder to keep the markets in perspective. When you have a 4-5% pullback in a single day (Thursday), sentiment becomes extremely nervous. We were promised the “Roaring 20’s”, yet sentiment would say people are feeling more like the great depression. You know it’s bad when CNBC begins to run their “Markets in Turmoil” segments. 


What does it mean for investors? With sky high inflation, a Fed in the midst of a major tightening cycle, and slowing profits and guidance from some of the biggest names in the stock market, it feels like everything is working against investors. As many people feel a recession is imminent, the normal “safety assets” like bonds are down double digits due to rising rates, and stocks feel scarier than ever given the latest investor sentiment readings. With the current environment working against nearly every asset class, what are investors to do? 


I’m going to do my best to share some charts and data that I find helpful in this market environment. While it feels bad now, I continue to find glimmers of hope in the market. For one, employment numbers came back on Friday and we added over 400,000 jobs in April. Wages continue to rise (5.5%) year over year, and while this isn’t keeping up with the current inflation readings, I do believe that inflation is at or near peak and will continue to decline to more manageable levels. Lastly, the average American consumer is in good financial standing. Cash balances are up, they are not overleveraged, and they continue to spend money. All positives to keep the economy humming along. Let’s take a look at some data I find important today:


Chart #1 – Household Cash vs. Debt

As you can see from the above chart, U.S. household cash exceeds debt for the first time in three decades. That’s important because, unlike the last two major recessions (not counting the brief Covid pullback), the U.S. consumer is not as leveraged as it was in the past. We could continue to see slower spending as consumer sentiment is nervous about the effects of inflation, but a slowdown to the economy would have a much less impact on most Americans than we’ve seen previously. Even if we were to enter, by definition, a recession it most likely would be shallow and shorter than we’ve experienced in the past. The other big takeaway from the right side of the chart above is that before every recession we’ve seen (not including Covid), net debt to GDP ratio was on the rise. It’s currently dropping. This is encouraging to us.


Chart #2 – Job Openings vs. Unemployed Workers


For the last 20 years, there have always been more unemployed workers than there were available job openings. You can see in 2000 and later in 2007, these trend lines were pointing down. We currently find ourselves in a position where there are approximately 11 million job openings, with 5.5 million people looking for work. The labor market is tight. Really tight. It’s one of the best job seeker markets we’ve ever seen. And April’s jobs report was incredibly strong. It’s true that recessions tend to begin at market cycle tops. However we continue to see growth among corporate America. Until we start to see a trend of job cuts and slow down in hiring, the overall economy continues to grow. Again, another positive in this time of uncertainty.


Chart #3 – Investor Sentiment


There’s no doubt about it, Investor sentiment is bad. I’m amazed it’s worse than it was during Covid, and we haven’t seen it this bad since the depths of the Global Financial Crisis. Only two other times in the past 30+ years has it been this bad. What does this mean for investors? One takeaway I’ve had is that investors really don’t like inflation. Especially when it’s been nonexistent seemingly for decades, aside from health care and education. We haven’t seen this type of pressure on day to day items, and with the added tightening by the Fed, investors are pretty negative. The other takeaway is that markets tend to bottom when things feel their worst. Are we seeing that now? Impossible to say. But markets always begin to recover before we get any positive news. The numbers aren’t good today, but it could mean we’re closer to a bottom.


Chart # 4 – Financial Obligations



Lastly I just want to share financial obligations as a percentage of household disposable income. It’s well below past peaks leading up to recessions even though it is on the rise. With the consumer making up over 70% of GDP, it’s always important to factor their strength when thinking about the overall economy. I do think spending is tightening with fears of recession (we’ve seen this in e-commerce earnings this week), but we’re also seeing strong spending in services, travel & leisure. Their stocks have reflected it this week, down much less than other consumer discretionary areas. While inflation fears are real, the consumer continues to show strength which will help ease some of the recessionary fears.


In conclusion..


I am neither a market technician nor a market timer. I do my best work trying to keep things in perspective for clients to make the best long-term decisions for their financial health and wellbeing. Could this market continue to go down? Absolutely, this write-up is not intended to call a bottom. But I am encouraged by the strength of the underlying economy.


While it’s important to remember that the stock market isn’t the economy, a strong consumer economy will support many of the companies we all love and invest in. There is no doubt plenty of headwinds in front of us, but the market already reflects this. I saw a stat last week that 60% of NYSE companies are down more than 20% from their highs, and over 70% of Nasdaq stocks are down over 20%. The bear market is already here. With Thursday’s massive selloff, combined with low investor sentiment, maybe we are closer to a bottom than we realize. 


The market is forward looking. It started getting worse in the midst of record strength in the economy, and it will recover when everyone least expects it. Over the past 40 years the S&P averaged an annual 14% drop from peak to trough, which is exactly where we are. It doesn’t make this selloff feel any better, but it’s relatively average. It’s also the price of admission to achieve long-term gains. If you want returns above a risk-free rate, understanding what this risk looks like is critical. Clients who have a plan are best suited to navigate this environment, giving them the confidence and framework they need to make good decisions during a selloff. 


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