Walks Like a Duck, Quacks Like a Duck
In recent weeks, due in large part to a market rally that kicked off the year, the idea of a “soft landing” has grown in popularity. We are at a point in this situation where any outcome is still possible and nothing has been confirmed. But in my opinion, a good old fashioned “pros and cons” list is very telling.
We will all know how this unfolds in time. For the time being we remain in this purgatory state between optimism and pessimism — the only thing that seems to be definitively on the rise is the level of bitterness between market participants who oppose one another.
It’s no secret that I’ve been on the cautious side of the field. I warned about the signals that, at the very least, point toward an economic downturn — and a more broad-based classic recession at most. I recognize that a few things remain in the “pros” column — perhaps the most talked about being the labor market — but I think it’s important to be real about the undeniable truths that sit in the cons column.
Undeniable Truth #1
There are leading, lagging, and coincident indicators. One of the most comprehensive leading indicators is called exactly that: the Leading Economic Index (LEI). Rather than looking at it for the absolute index level, the rate of change and direction of the trend is more telling.
Specifically, the 6-month annualized change in this index is -8.2%. That measure has never fallen below -3% without a recession to follow. There’s a first time for everything of course, but the historical pattern doesn’t bode well. As we sit here without confirmation one way or another, I’d argue the leading indicators are the most important to watch.
Undeniable Truth #2
One of the components that affects the LEI is the manufacturing side of the economy, and a way we measure that is with the ISM Manufacturing PMI survey. Since our economy is now more dependent on services than ever before, we luckily also have an ISM Services PMI survey to watch.
The way these work is any reading above 50 indicates economic expansion, and anything below indicates contraction. There are components of these indexes that would be considered “leading” (i.e., new orders), components that would be more “coincident” (i.e., production), and some that may even be “lagging” (i.e., backlog orders).
The composite indices, however, serve as a leading or coincident indicator for recessions, and both the manufacturing and services PMI indexes have fallen into contraction territory. Services in particular just saw its first reading below 50 since the Covid lows. In the prior three recessions, the recession start date ended up being just before the Services PMI fell below 50.
The next read on Services PMI is coming on Feb 3rd and I’ll be watching very closely.
Undeniable Truth #3
Labor market strength continues to be the sharpest weapon in the optimist’s toolbelt, and for good reason. Initial jobless claims remain contained, payroll numbers show persistent jobs added, and job openings remain high. But the labor market is not a leading indicator. It’s decidedly lagging, and it’s very possible (if not probable) that we just haven’t seen reality come through in the headline data yet.
There is some data that can foreshadow what might be on the horizon. Namely, the trend in temporary help. This measure has been falling since August 2022 and doesn’t show any signs of turning around.
Intuitively, employers will cut temporary or contract workers before having to cut full-time employees, so this serves as a decent leading indicator of where the broader labor market could be headed. The Richmond Fed has even penned a report stating that the change in temporary help tends to lead the overall employment market by about six months. That would suggest that unemployment data could be set to weaken starting with January or February readings.
Undeniable Truths #4 and #5
I’m running out of space so these last points need to be consolidated. Some of the other items in the cons column that serve as undeniable truths of rough air to come are those of the stock and bond markets.
Markets are irrefutably leading indicators, but this is where it gets murky. Many would stop me here and say, “stocks are rallying, the lows are in.” That may end up being true, but I would offer the counterpoint that stocks remain in a longer-term downtrend and still cannot seem to break above the resistance levels. Furthermore, during the shorter-term rallies we’ve seen, the parts of the market that have been hit the hardest are the parts that rally the most. That’s characteristically bear market behavior. We’re not out of it yet.
The yield curve is telling a more clear story. Curve inversions at the 2-Yr/10-Yr, 3-Mo/10-Yr, and the near-term forward spread are numbers we cannot ignore. These are no longer brief nor shallow inversions. And although there have been inversions (typically of the brief and shallow variety) without recessions to follow, there has never been a recession without inversions that come first.
Swims Like a Duck
From my vantage point, I see a duck. That said, I’ve been wrong before and I could be wrong again. Maybe it’s a very small swan. Or a baby ostrich imitating a duck. I’m pretty sure we can rule out flamingo, but stranger things have happened.
In any event, the best we can do is work with the information we have. My information says stay cautious, the economy is fragile.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
More from MediaFeed:
8 stock picking tips for new investors
Putting together your first portfolio doesn’t need to be daunting. To help you get started, we broke the stock-picking process down into eight actionable steps any beginner investor can follow.
nortonrsx
Investors can be broadly sorted into two categories: active and passive. As the name suggests, active investors take a more hands-on approach to their investments. They consistently monitor and manage their portfolios by making trades and analyzing stocks. Taking this approach to the extreme are day traders, who may buy and sell any number of stocks on a daily basis.
On the other hand, passive investors tend to favor a buy-and-hold approach and typically execute fewer trades. On the extreme end of the passive investment strategy are those who rely on robo-advisors or portfolio managers to manage their investments on their behalf.
A big part of knowing what your portfolio needs starts with identifying the type of investor you are. What are your financial goals, both short-term and long-term? And what do you hope to achieve with your investment portfolio?
DepositPhotos.com
Broadly speaking, stocks can be classified by the type of investment goal they’re best-equipped to serve:
- Income. Income investments pay regular dividends and typically include low-growth stocks, bonds and real-estate investment trusts (REITs). Income stocks are best for investors who want a steady trickle of income from their investments.
- Value. Value investments are designed to preserve wealth and hold their value: think blue-chip stocks like Microsoft or Disney. Value stocks are suitable for investors seeking a long-term asset that will protect their wealth.
- Growth. Growth investments come from young companies with plenty of growth potential. These stocks require active management and tend to be volatile — they’re best handled by experienced investors and day traders.
A healthy portfolio is a balanced portfolio. And that typically means holding an assortment of all three of these types of stocks in your brokerage account. Getting the ratios right ultimately comes down to what type of investor you are. For example, active investors may prefer a higher concentration of growth stocks, while more passive investors may prefer value or income stocks.
utah778/ istockphoto
Once you’ve identified what type of stock you’d like to pursue, it’s time to select a market sector or industry. There are 11 stock sectors according to the Global Industry Classification Standard (GICS), and each of these sectors can be further broken down into 24 industry groups.
Many first-time investors find it helpful to start with what they know, which is to say: Pick an industry that personally interests you. Maybe you’re a tech junkie. Maybe you have aspirations of flipping houses or becoming a landlord.
Let personal interest be your guide, but don’t be afraid to rely on market news, industry newsletters and analyst recommendations for ideas. There are plenty of free resources for those just starting out.
undefined undefined/istockphoto
With a sector or industry in mind, you’re ready to start narrowing down your stock options. In any given sector, there may be hundreds of stocks to choose from, so eliminating the stocks that aren’t suitable for your portfolio or budget is a critical step in the stock-picking process.
To help you filter out unsuitable stocks, consider a stock screener. Stock screeners are online tools designed to help you narrow your investment options by a variety of metrics. You can screen stocks by market, exchange, sector, industry, price and more. Most online brokerage accounts come equipped with a stock screening tool that’s free to use so long as you have an account. But there are also quite a few free third-party stock screeners you can access online to help you do the job.
DepositPhotos.com
Found a potential stock for your portfolio? Understanding how to value a stock is integral for any trader. Here are some of the core pieces of financial data you’ll want to look at when considering a stock’s potential value.
- P/E ratio. Determine the price-to-earnings ratio by dividing a stock’s price per share by the company’s earnings per share. This articulates how expensive a stock is by revealing how much investors are willing to pay for a dollar of company profit.
- D/E ratio. As the name suggests, a company’s debt-to-equity ratio is a measure of how its debt stacks up against its equity. This figure can help you gauge a company’s financial health and can be found by dividing its total liabilities by its total shareholder equity. These figures can typically be found on a company’s balance sheet.
- Revenue growth. Examining a company’s total sales over a set period of time is a way of looking at its revenue growth. This helps you determine whether the company is growing or declining.
- Dividend yield. Does the stock you’re considering pay dividends? Not all do. Take a look at the stock’s dividend yield to get a better idea of how frequently the stock pays dividends and how the yield has grown or diminished over time.
g-stockstudio/istockphoto
Any talk of timelines boils down to the length of time you plan to hold onto a stock. For example, investors executing a buy-and-hold strategy may hold onto a stock for years, either waiting for it to increase in value or holding it as it rewards them with dividends — or both.
Day traders, on the other hand, buy stocks with the intention of quickly flipping them for profit, typically over the course of the same day. Before you execute a trade, consider your investment goals against the type of stock you’re preparing to add to your portfolio.
Have a clear exit strategy in mind and a clear definition of when it’s time to sell. Are you willing to weather some volatility? How high or low does the stock need to be for you to get out? Committing to an exit strategy is a practical way to guard your portfolio from the types of losses triggered by impulsive investing.
DepositPhotos.com
To assemble your portfolio and execute trades, you’ll need a brokerage account. Compare commissions, fees and research tools to find the platform best suited to your investment objectives.
Prostock-Studio / istockphoto
Once you’ve decided on a stock you’d like to purchase, it’s time to execute the order:
- Locate the stock. Log into your brokerage account and pinpoint the stock by searching for the company name or ticker symbol.
- Select your order type. There are numerous order types available, including market, limit, stop loss and stop limit orders. To purchase the stock right away at the current market price, select market order.
- Ensure you have enough buying power. Before you execute the trade, make sure you have the account funds to complete the transaction.
- Add the number of shares. Enter the number of shares you’d like to purchase and review the total cost of your order.
- Submit. After reviewing the order details, submit the order to execute the trade.
Drazen Zigic/istockphoto
For those new to investing, the process of selecting stocks for a first-time portfolio can be overwhelming. Before executing any trades, take some time to assess your investment goals, select a strategy and review your brokerage account options.
Related:
This article
originally appeared on Finder.comand was
syndicated by MediaFeed.org.
DepositPhotos.com
Featured Image Credit: DepositPhotos.com.
