Recession Obsession!

Just Stick to the Plan!

How can anyone possibly navigate a market that’s turbulent one day and ecstatic the next? What should investors do with all of the mixed signals and information overload? The simplest solution is usually the best one, and it involves filtering out a lot of the noise.

First and foremost, don’t try to time your trades in anticipation of a recession. Check the search engine stats and you’ll see an uptick in “recession” searches, especially in the wake of the July jobs report.

It’s true that economic hard landings have historically followed after the U.S. unemployment rate bottomed out (usually in the 3s) and then turned upward. This recessionary signal is relevant now with July’s unemployment rate rising to 4.3% from 4.1% in June.

Along with that, there’s suddenly renewed interest in something we’ve been discussing for a while: the spread between the 2-year and 10-year U.S. Treasury bond yields. When the difference between those yields goes negative but then “steepens” (comes back up), this has historically been a recessionary signal much like the rising unemployment rate.

It’s an odd situation now, though. In the past, most retail investors weren’t even aware of these red flags (though our readers knew about them and hopefully took appropriate action). Nowadays, however, the widespread availability of information has changed the game.

You can actually see commentators discussing the steepening yield curve on mainstream television now. This type of arcane knowledge was previously reserved for sophisticated investors, but people are now self-educating, which is a good thing in certain respects.

Retail investors are also quickly learning about market breadth. They’re now aware that the vast majority of S&P 500 stocks didn’t participate in the wild rally of 2024’s first half.

People are waking up to the lack of balance and proportionality in the S&P 500 index. They see that a small handful of so-called “Magnificent Seven” technology stocks are propping up an index that’s supposed to represent 500 businesses.

They’re also figuring out ways to seize the opportunities that present themselves during these unbalanced market conditions. Just look at the wide-open alligator jaws in the chart shown above for a prime example of how the market has piled into mega-cap tech stocks while rotating out of resource-sector businesses.

There’s an old saying that alligator jaws always shut sooner or later. It’s really just a question of whether high-valuation-multiple tech stocks will correct downward or commodity stocks will correct upward – or perhaps both.

Either way, it’s hard to imagine that stocks representing businesses that mine for essential resources will collectively stay down there for much longer. Just keep in mind a quote from billionaire Sam Zell: “Great money is made in businesses that lack capital interest, not the other way around.”

In other words, there are opportunities right now if you’re not distracted by shiny metal objects like the supposed “A.I. gold rush.” It’s funny how the mainstream media hardly ever talks about the actual gold rush (not the A.I. one) that’s happening as central banks around the world add to their gold stockpiles.

They also love to portray a picture of an economy that’s running on all cylinders. The media will print a headline about declining initial jobless claims but then bury the fact that the number of continuing applications for unemployment benefits just reached its highest level since November of 2021.

It’s all fine and well that U.S. initial jobless claims declined for one week, but this doesn’t negate the overall trend. As you can see, it’s just a “higher low” in a broader uptrend.

The spin doctors will always use mental gymnastics to make bad news look good. Stifel chief economist Lindsey Piegza, for instance, concluded from the jobs data that there “may be more of a normalization in terms of [labor market] conditions, as opposed to an indication of outright weakness lurking around the corner.”

If that’s the most optimistic conclusion that Piegza could come up with then this doesn’t bode well for the economy and broad market index fund investors. However, this isn’t a call for anyone to obsess over recessionary prospects or try to time the next economic downturn.

Thankfully, there’s no need to do any of that. Instead, you can just stick to an all-weather plan that includes a balanced portfolio, especially during a time when the major stock market indices are so woefully unbalanced.