2023 Year-End Letter, Part 2: The Economy and the Stock Market

In this year's Part 2 we're updating the data and our narrative (recession risk remains elevated) on the state of the economy, using a format similar to last year's Part 2.

Yes, our recession light was lit last December, and it remains lit a full year later... And, while I state, ad nauseum, in the videos that our model is not a timing indicator, but rather a risk measure, we nevertheless need to get our heads around what's held the economy up amid such dire signals from too much of the data.

Now, before we go there, I should mention that what is widely viewed as the most reliable of all recession signals -- when the 2s/10s treasury yield curve goes inverted -- comes (historically) with a lag of 7 months to 2 years between initial inversion and the onset of recession .

I should also mention that in October 2022, Bloomberg Economics literally assigned a 100% probability that we'd be in recession within the ensuing 12 months... Well, that didn't happen.

So what gives?

Market Update: Seasonality vs The Technicals, plus Yields, The Dollar and Gold (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

2023 Year-End Letter, Part 1: If A Blizzard Hits, Characteristics of The Best Portfolio Managers, and An Invaluable, Timely, Quote-Fest

As you (clients) know, I enjoy using analogies to explain our view of market and economic general conditions... In the past I've associated our macro analysis with the flight path of an eagle affixed with electrodes, etc., that allow us to monitor its vital functions as it glides across blue skies, sores to high altitudes, and flaps its way through the storms that occasionally cross its path.

Fishing, basketball and ice skating have also inspired some storytelling that has helped me drive home how we approach the task of preserving, protecting and growing our clients' wealth in a manner that has them satisfying their objectives while, ideally, feeling comfortable amid the inevitable ups and downs delivered by world markets.

Morning Note: Equity Market Conditions Remain Challenged

Here's the intro to our internal monthly equity market conditions analysis, including our technical view of the current US dollar setup:

11/30/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -41.67 (-16.67 from 10/31/2023)

SP500 Index November 2023, +8.92%:

SP500 Equal Weight Index November 2023, +8.87%:

November turned out to be the best month of 2023.

While the EMCI score was still net negative, it had risen an unusually large 33 points by the star of the month.

Economic Update: Classic Late Cycle, Copper & China, Bullish Sector Signal, Stocks, Sentiment, Gold (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Novembers Past, Santa Headwinds, yada yada (video)

The following quote (and video), along with our own models, speaks to our stubbornness around remaining hedged right here:

"Stock investors should hope for the best but prepare for the worst when it comes to gauging the outlook of the US economy. Soft-landing optimists have a case to make, yet the historical evidence is overwhelmingly bearish when it comes to the end of previous Fed hiking cycles. Equities face steep losses if the economy sees a “softish” or hard landing.

In the 11 times when the Fed has tightened monetary policy to combat inflation since 1965, stocks escaped largely unscathed only about three times. The other occurrences saw average peak-to-trough losses of nearly 30% in the years after interest rates peaked."

-- Tatiana Darie (Bloomberg)

 

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Pricing Power and the Price of Labor

FYI, for the next few weeks (to year end), I'll be a bit less active, and less voluminous, here on the blog, as I'll be devoting the time normally spent organizing, then articulating, my thoughts for the daily message to what, as usual, will be a several part year-end message (delivered over the final two weeks of the year)..

So, for this morning, just the following graph (H/T BCA Research), followed by my brief assessment, and some critical investment wisdom from the late great Charlie Munger: