From the Desk of Jack Kennedy III
Like most everything in life, there’s no beating father time. Unceremoniously for most, March 9th of this past year marked the 11th anniversary of the “Great Recession.” While the average economic recovery lasts seven years, this recovery lasted eleven years and acquiesced to the inevitable – the effects of aging. With this in mind and the understanding that with aging comes fragility, the KIG team has been actively tracking the number of days since our last recession. During your office visits, you may have noticed the flip chart carefully placed in my office since 2016 serving as a continuous reminder to ourselves and our clients that a recession is statistically on the horizon. Having successfully managed investor savings through the 94', 01', 02', 08', and 09' recessions, there have been many lessons learned. There’s one lesson that stands above the others and is undisputed amongst today’s leading investors; during economic downturns, it’s not what you own – it’s what you avoid that matters most. Driven by this historically-proven principal, KIG has intentionally avoided the automotive, airlines, retail, hotel, travel, entertainment and advertising sectors during this period of instability. It’s also understood that these sectors will continue to struggle as our nation slowly begins to reopen travel and business activities.
The past several months has been a journey of many twists and turns with the stock market achieving an all-time high on February 12th, quickly followed by a four-year low thirty-nine days later on March 23rd. Looking back at this period of uncertainty, I can't help but smile remembering the many calls we received from clients asking, "Where's the opportunity?" While it’s impossible to know where the bottom is or how low prices will go, there’s a point in every "sale" price when you can't help but smile and know in your heart that you just got a bargain!
Any opinions are those of Jack W. Kennedy and not necessarily those of RJFS or Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready. You won't do well in markets." - Peter Lynch
The Expansion is Dead, Long Live the Recovery
Chief Economist Scott Brown discusses current economic conditions.
The National Bureau of Economic Research (NBER) has formally declared that a recession began in February. The expansion lasted 128 months, the longest on record (at least back to 1854). Economic data reports should suggest that the downturn may have ended in April. That doesn’t mean everything is okay. Rather, the economy appears to have begun growing again (granted from a lower base). Fiscal support and an aggressive response from the Federal Reserve have helped to lessen the damage, but much will depend on the virus and the unwinding of social distancing. Downside risks remain. Following an initial sharp bounce off the bottom as state economies re-open, it will take many quarters to get back to where we were at the beginning of the year.
The NBER defines a recession as “a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators.” A recession begins (and an expansion ends) when the economy reaches a peak of economic activity and ends (as another expansion begins) when the economy reaches a trough and starts growing again. The NBER does look at Gross Domestic Product (GDP), but that is only available on a quarterly basis. Monthly figures play a key role in the determination, including nonfarm payrolls, industrial production, real (inflation-adjusted) business sales, and real personal income. These are the same four components in the Conference Board’s Index of Coincident Economic Indicators.
In declaring beginning and ending dates for recessions, the NBER’s job is to be definitive, not timely. For example, the start of the 2007-2009 recession, which ran from December 2007 to June 2009, was not declared until December 2008, while the ending date was declared in September 2010, more than a year after the recession had ended. The declaration of a recession normally depends on the duration of the downturn. One negative quarter has never been enough. However, the NBER noted that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”
Nothing recedes like recession. Economic data reports are fuzzier than usual because of collection problems related to the coronavirus, and figures will be revised, perhaps a lot. However, at face value, the improvement in payrolls, along with expected rebounds in retail sales and industrial production (to be reported June 16), suggests that the recession may have ended in April. Obviously, that will depend on whether we see a further relapse in economic activity. A second wave of infections could lead to a more stringent and extended period of social distancing (although it’s been noted that you can’t really have a second wave if you never completed the first). Most likely, activity will continue to improve as social distancing guidelines are relaxed, but enough people will continue to self-isolate to keep the recovery at a gradual pace.
The Federal Open Market Committee (FOMC) meets eight times per year to set monetary policy. At every other meeting, senior officials (the five Fed governors and 12 district bank presidents) put together their projections of growth, inflation, and unemployment, as well as what each thinks the appropriate federal funds target rates should be over the next few years (the dot plot). The outlook was so uncertain in March that the Fed refrained from issuing forecasts. In June, the outlook had shifted dramatically from December. GDP is now expected to fall sharply in 2020 (4Q/4Q), with a strong but partial rebound in 2021, leaving the unemployment rate elevated (a 9.3% average for 4Q20, 6.5% for 4Q21). Nearly all officials expect short-term interest rates to remain low at least through 2022.
None of the central bank’s projections should have been a surprise, as they were in line with expectations of most private-sector economists. However, stock market participants were apparently hoping for a rosier outlook.
Judging by the news reports last weekend (including 60 Minutes). There is still a lot of confusion about the classification issue with the unemployment rate. In the household survey, furloughed employees should be classified as “unemployed on temporary layoff,” but many were tallied as “employed.” This reduced the unemployment rate by a full percentage point in February (it should have been about 5.4%, vs. the reported 4.4%), five percentage points in April (19.7% vs. 14.7%), and three percentage points in May (16.3%, vs 13.3%). There is nothing sinister here. The administration is not cooking the books. Since the Bureau of Labor Statistics can’t generate accurate estimates of the impact, it will leave the data as reported. This may not seem to matter much, as many furloughed individuals will eventually return to work, but many won’t. Note that the unemployment rate understates the weakness in the labor market during tough times, as many individuals drop out of the labor force and are no longer considered “unemployed.” As a general rule, one should take economic data with a grain of salt.
The opinions offered by Dr. Brown should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you today.
All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates (RJA) at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA may have information which is not available to the Research Department about companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report which may not be consistent with the report's conclusions. RJA may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this report. For institutional clients of the European Economic Area (EEA): This document (and any attachments or exhibits hereto) is intended only for EEA Institutional Clients or others to whom it may lawfully be submitted. There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results.