Quarterly Comments

Growth, Slow Growth or No Growth

February 15, 2023

I think I can speak for all of us when I say we are feeling, if not a bit better, then less fearful than we were a few months ago. The equity markets are up, and the bond market is looking more attractive than it has for several quarters.

Looking forward, the question we are debating is this: Should we expect a real recession, or a “soft landing” which would be a mild and short recession, or a “no landing” which might be a series of rolling pullbacks in various sectors of the economy but no recession? There seems to be no clear consensus on any of these three scenarios.

Classic indicators of looming recession are here, and foremost among them is the severely inverted yield curve. The much higher short term Treasury rates are now almost a full percentage point higher than the 10 Year Treasury Bond rate. The other indicators are the Sentiment indicators for both Manufacturing and Services, both now below 50 which indicates a contraction.

However, and you knew there had to something “on the other hand,” the Consumer remains strong – we are shopping! Retail sales were surprisingly up with today’s report (Bloomberg, 2-15-23).  Unemployment remains at a decades low, and there remain almost 2 job openings for every person seeking employment. If the Consumer who makes up 70% of our economy remains steady, the economy may slow but not go widely negative. If this is what we get, we may experience not only slow growth in the economy but also slow growth in the markets. To reiterate – there is a probability we will get slow growth, not “no growth.”

Many analysts, among them Gina Martin Adams (Bloomberg, 2-6-23) have stated they expect we are in a Cycle Turning Point, perhaps taking first steps in a recovery. What sectors of the market usually do well in this type of Cycle Turning Point? The Value type of equities which offer low to no debt, dividends, and whose P/E’s are generally lower might be good candidates. We believe this is where the opportunity in equities has been, and we are generally positioned to remain here through the end of the second quarter.

Higher interest rates across the board seem to be offering a renewed opportunity in the bond markets. We expect that short term interest rates will remain high, and may move higher with the next few moves by the Federal Reserve. While rates moving up will temporarily clip our existing positions’ total return, we believe that rates will come down when the Fed comes to the end of its tightening cycle. We cannot say when this “pivot” will occur, but when it does it should prove beneficial to our bond positions, and we will have enjoyed a very nice yield while we wait.

Transitions are usually choppy, and as we continue to transition to a post-pandemic economy we should expect volatility. Pulling from past experience, however, we believe our strategy of planning for slow growth this year will position portfolios for positive outcomes with an eye to risk mitigation.