NEWS
What Happened This Week
US imports experienced one of the largest one-month drops in the trade deficit in modern US history, as companies front-ran tariffs in March by stocking up from international suppliers, followed by April’s resurgence of domestic orders after tariffs were put in place.
US inflation is very close to the targeted average of 2%, with the latest headline Personal Consumption Expenditure (PCE) being up in April only 2.1% from a year prior.
M2 money supply hovers just a hair above where it was in April 2022, suggesting a likelihood that widespread inflation pressure may continue to moderate (all else being equal).
US job growth continued to slow in May with an addition of 139,000 jobs, but faring slightly better than the expected 130,000.
The ISM Purchasing Managers Index for May is:
- Services PMI: 49.9%
- Manufacturing PMI: 48.5%
The Conference Board’s Leading Economic Indicator is approaching its “recession signal” zone.
How I See It
A number of warning signs appear to be developing in the market.
While forecasting market movement is never an exact science, there are a few things we can recognize as potential early warning signs.
- Short-term trend remains negative: the S&P 500 50-day moving average is still below the 200-day moving average.
- Purchasing Managers Indexes have dropped below 50 for both manufacturing and services.
- Leading Economic Indicators tracked by the Conference Board are approaching close to recessionary levels.
- The Shiller Price-to-Earnings ratio remains above its average of the past ten years.
There’s no perfect indicator, or combination of indicators, to predict markets.
But the current situation bears attention to the possibility of a bear market developing out of heightened expectation of recession.
Here’s the thing: markets can remain high even in the midst of seemingly conflicting data. It wouldn’t be unprecedented for the S&P 500 to rise 20% or more in a year even amid mixed data.
But the risk right now of a more extended downside, to me, seems uncomfortably like the flip of a coin.
What do I do in situations like this? It depends on the time horizon I have for my goals. If I’ve designed my asset allocation properly from the beginning, I don’t really need to do anything. If I’ve taken on more risk than I should, then it might be time to do some risk management by allocating a greater portion toward assets with lower short-term risk (such as government Treasuries and high-quality corporate bonds).
I’m never all-or-nothing when it comes to investing. There should always be a “what if I’m wrong” strategy to balance things out.
Moderate risk allocations, for example, could look like a 50/50 or 60/40 blend between a diversified selection of stocks and bonds.
Moderate risk allocations, for example, could look like a 50/50 or 60/40 blend between a diversified selection of stocks and bonds.
While this won’t prevent losses in a downturn, its diversity and low correlation are likely to make the downside more moderate than it would be with an all-stock portfolio. And if markets rise from here, this mixed allocation retains the ability to capture a meaningful share of the upside.