As I've been pointing out in nearly every video commentary of late, the data, on balance, have indeed improved; lessening the risk of imminent recession... I've also pointed out (charted for viewers), however, the counterintuitive fact that much of the data we measure have historically-tended to see a last-gasp ramp just before the onset of recession... Hmm...
So, while, indeed, such macro improvement has us considering where to adjust allocations to take full advantage of a potentially-improving setup, history says we nevertheless need to -- at the same time -- remain on our toes, at least for the time being.
BCA's Doug Peta was a member of team-minority in 2023 -- they bucked the overwhelming consensus that a 2023 recession was a virtual lock -- and predicted (correctly, I might add) no such contraction.
Fast forward to today, and, well, Doug and colleagues have changed their tune (and, ironically, are out of consensus once again)... Here's from a very thoughtful piece he penned last week:
"In the latter stages of every expansion, especially ones that are unusually potent or lengthy, investors and economists begin to muse about the end of the business cycle. The latter ought to know better, but diversity of opinion makes a market and keeps us employed, so we’re glad they don’t. At least the swelling no-recession consensus and increasingly rosy expectations improve the risk-reward profile of our defensive positioning."
I'm listening, again, to Nassim Taleb's provocative book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.
The following quotes resonate with me, as they reflect how we think about our investment process (i.e., our duty to our clients) when the data and the market internals smell of atypically-high risk:
"It does not matter how frequently one succeeds if failure is too costly to bear."
Taleb made his fortune first as an options trader/money manager, then as a multiple best-selling author... The following really resonates with me (as we construct such packages during times of high risk, as we deem them):
"Say you engage in a business of protecting investors from rare events by constructing packages that shield them from their sting; something I have done on occasion. Say that nothing happens during the period; some investors will complain about your spending their money. Some will even try to make you sorry - "you wasted my money on insurance last year! The factory did not burn. It was a stupid expense! You should only insure for events that happen." One investor came to see me fully expecting me to be apologetic; it did not work... But the world is not that homogeneous; there are some, though very few, who will call you to express their gratitude, and thank you for having protected them from the events that did not take place."
"The factory" of course being his metaphor for his client's portfolio...
And here's from yesterday's entry to our internal log:
10/28/2024
Near-term (into early next year), the major US equity averages could see further moves into all time high territory; all things equal (election risk notwithstanding), odds probably lean in that direction… However, US equities exhibit characteristics that – while of course anything can happen, or continue happening, in markets – all but assure (historically-speaking) a precipitous decline as this late-cycle phase plays itself out:
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