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Volume 11, Edition 16 | May 16 - May 20, 2022

Capitalizing on Recession Talk

Doug Walters, CFA
Will there or won’t there be a recession was the topic of many economic discussions this week. For investors, seeing through this noise to the bigger picture is essential to long-term wealth creation.

Contributed by Doug Walters, Max Berkovich, David Lemire

This week brought to bear talk of a potential recession as retail stocks fell sharply on earnings. A recession is certainly one possibility but far from guaranteed. There is a silver lining for stock investors in the recent market weakness.

Recession. This week, the word was heard despite the US economy still being relatively strong. The typical definition of a recession is two successive quarters with declining Gross Domestic Product (GDP). We’re not there yet. But with the Fed raising rates and inflation running high, investors are concerned. Those concerns are reflected in US stocks, which at one point during the week were down about 20% from the January 3rd peak.

The good news for investors today is that stocks have already experienced declines approaching those of the average recession. According to analysts at Goldman Sachs, of the past 12 recessions, the average peak-to-trough decline of the S&P 500 was 24%. In fact, the average return during the actual recession (the quarters when growth is negative) is positive. Why? Because stocks are forward-looking. So even if a recession is pending, it may not mean more pain for stockholders.

Disciplined, evidence-based investors know these dynamics. Rather than speculate about whether or not a recession is pending, patient investors see declines like these as opportunities. Smart decisions at times like these are the building blocks of long-term wealth creation.

Headline of the Week

Stocks declined once again this week, with the S&P 500 falling around 3%. Recession concerns were top of mind, but the drag of the big box retailers provides our headline of the week.

Big Box, Big Trouble

Major retailers like Target (TGT) and Walmart (WMT) reported earnings this week and raised the antennae of economy watchers.

  • On Tuesday, Walmart reported earnings that fell well short of expectations despite beating on revenue.
  • On Wednesday, Target followed with an even worse miss on earnings despite good revenue growth.
  • The companies highlighted challenges in managing escalating costs and supply issues.
  • Investors were unimpressed and sent the shares reeling. Walmart ended the week down around 20% and Target 30%.

This week’s retail stock drama is a good reminder of the benefits of diversification. Walmart and Target are great companies and great operators on many measures, but that did not insulate them from this challenging environment.

The Week Ahead

Earnings season has come to an end. A slow news week lies ahead with the Federal Reserve meeting’s minutes, an inflation report, and the Q1 GDP report as the big-ticket items.

Consumption Function

The Personal Consumption Expenditures Index (CPE) will be out on Friday.

  • This inflation measure is expected to show a decelerating rate of inflation.
  • Inflation rates both year over year and month over month need to show progress to calm uneasy investors.
  • Personal income and Spending for April will be revealed as well.
  • Also, the University of Michigan Consumer Sentiment Index is out on Friday.

Domestic Affairs

Gross Domestic Product (GDP) is out Thursday but should surprise no one when, on an annualized basis, a contraction of 1.4% is announced because this is a second reading.

  • Many economists still expect the domestic economy to grow this year and seem to pencil the first-quarter number as a blip.
  • The same economists link shortages and supply issues as the main culprit.
  • Any improvements in the revised number would help that argument.

Minute by Minute

The Federal Reserve will issue meeting minutes of its previous meeting on Wednesday.

  • All eyes will be on hints of the path of rate hikes.
  • Any caution over the balance sheet reduction plan will also be of importance.
  • In the last meeting, the central bank moved the target rate by 1/2 of a percent to 1%.
  • The market expects the same next meeting, so hints of a bigger hike will alter the status quo.

Need a Distraction?

If you need a distraction, the sports world has it.

  • THIS WEEKEND, the PGA Championship has a stacked field with John Rahm, Rory Mcilroy, Jordan Spieth, and Justin Thomas highlighting the field. Tiger Woods is in the field as well.
  • The NBA conference finals will have Golden State Warriors slug it out with Dallas in the West while the Boston Celtics take on Miami in the East.
  • The 2nd round of NHL playoffs is in full swing. However, the AHL season ended for our hometown favorites Utica Comets.
  • A full slate of Major League Baseball, Premier League for the soccer fans, and NASCAR in Texas are also on the docket for the weekend.

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