Liz Looks at: Precarious Patterns

It’s Not Over Till It’s Over

The good news is that when this rough patch is over, we can look back on it as another history lesson and use it as a guide for cycles to come. The bad news is I don’t think it’s over yet. But we’re getting closer.

As is always true, the market looks forward while economic data looks backward. The size of the time-gap between the two varies, but is measured in months — not days or weeks.

At this point, with a drawdown of almost 30% in the Nasdaq and almost 20% in the S&P, we can agree that the market started “forecasting” rough waters months ago. The reason I don’t think it’s quite over yet is because the economic data hasn’t entirely caught up.

It’s Always Darkest Before the Dawn

Last week I wrote that the temptation to call peak inflation has become almost as contagious as the temptation to call a market bottom. As has been proven many times, calling bottoms with any consistent accuracy is nearly impossible.

What we can do, however, is shift our focus to some of the economic indicators that haven’t cracked yet. If the market cracks first, the economic data should crack later and we can start to feel more confident that the darkest hours are behind us.

What am I watching? The stuff that everyone keeps saying is so strong — the last few items in the “pros” column after so many moved to “cons.”

The most important of these is the consumer. Let me be clear that I’m not hoping for the consumer to fall apart. I’m simply saying that there likely needs to be some cooling in a few more metrics in order for inflation to fall, for the Fed to retract its claws, and for us to confirm that the market can stop forecasting dreadful days ahead.

Spending With a Vengeance

Despite inflation scaring the heck out of markets, it hasn’t yet scared the heck out of consumer spending. Which means demand hasn’t cooled much, and higher prices haven’t stopped the post-Covid revenge spending spree.

BUT, something that says the spending is getting a little harder to stomach is the recent growth in revolving consumer debt (below).

Yes, consumers built up their savings during the pandemic to $2.5 trillion, and that number still sits around $2.4 trillion. And yes, personal income levels have risen. But the personal savings rate has fallen to 6.2% — below the pre-pandemic level of 7.3%. Which means the level of spending increased faster than the level of income.

At some point, people have to make tough choices and demand should cool. The data that will reflect the cooling is personal consumption expenditures, retail sales, and revenues of consumer-dependent companies. In turn, inflation should reflect a more balanced supply/demand relationship.

Dropping Shoes

While we wait for some of the last shoes to drop, and for the darkest days to be behind us, stay focused on diversification and investing, not trading. This type of bumpy environment is when short-term trades can turn into long-term mistakes. Instead, work on building a portfolio that has allocations to high quality growth opportunities, while diversifying it with defensive positions for those rough periods. And wait for the gap to close between market action and economic data.

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