Morning Market Preview for September 23th, 2024

What is a business cycle?
It’s the ups and downs of the entire economy's Real GDP as it follows its overall trend.

The overall trend is upwards

Note: Oddly enough the term business cycle does not apply to a business. Rather, it refers to the entire economy (keeping us all on our toes I guess). 

As the US economy works its way upward it has its ups and down. The ups exceed the downs, and over time the economy (and the stock market) climb upwards. 

This occurrence is typical of a good, and normal, economy. It represents that the US economy is healthy overall, so it grows and performs well (upward trend).

But the US economy also encounters challenges along the way (the downs markets and slowing or shrinking GDP periods).

Importantly, individuals, companies, organizations, and government responds to the declines in order to “fix” the economy by solving a present challenge.

The US has been very good at fixing its economy as it meets challenges, plus we have a huge collection of smart and hardworking businesses full of good people and resources to fix their business (their slice of the economic pie).

Economists measure business cycles

These macroeconomists measure many variables to paint a picture and understand the past, present, and future economy. An example of a variable that is measured is Unemployment. Another example of a variable that is measured is Real GDP. There are tons of variables measured. But these variables are measured at regular intervals (perhaps once per week, once per month, once per quarter, once per year, etc.) When you measure a variable at consistent intervals it’s called a time series.

When you look at the time series (collection of data for one variable taken at regular intervals), you can see trends. Real GDP, Prices, and Unemployment are three massively important trends for economists. When the Real GDP trend shows increases for two or more quarters (a quarter is a 3-month interval, or a quarter of a year) then the economy is in expansion. If that expansion lasts for a long, long time (years) it is considered a boom. 

But when the Real GDP trend shows decreases for two (or more) quarters then the economy is in contraction. Historically, if the Real GDP is contracting then it was called a recession, but nowadays many economists look at more than just Real GDP before labeling the economy as being in a recession. 

(They will look at income, unemployment/employment, etc for an overall feel before using the word recession.) 

So expansion and contraction are not debatable: either your Real GDP continues to grow every quarter and you’re expanding (your economy), or your Real GDP continues to shrink every quarter and you’re contracting (your economy). Obviously, government is interested in having tools to end contraction, avoid recession, and restore expansion/growth — more on that later. 

The NBER (National Bureau of Economic Research) can officially declare a recession, but as an improving investor gathering your data do you want to just move with the herd and wait for the NBER to declare a recession or end of a recession? Or do you want to be one step in front of it? And even if you do wait, just understanding that an expansion or a contraction is coming can keep you emotionally calm and rational (buying low and selling high takes emotional control and sound reasoning). 

I saw that coming from a mile away” is a powerful feeling as an investor. It takes time to develop that — and you will still get surprised from time to time too. But since you’re winning more than you’re losing as you improve, you deal with it better.

Note: The NBER is typically full of Nobel Laureates and past members of the President’s Council of Economic Advisors. But, you know, good investors still ensure what they are reading and hearing makes sense to them.

Many economic factors correlate

For instance, Real GDP and Unemployment rates historically correlate (move together) very, very well. In other words, when Real GDP is going up then Unemployment is going down. When things move together but go in opposite directions that is called “an inverse relationship” or a “negative correlation.” They go in opposite directions, but at the same time; this can also be called countercyclical. And a direct relationship is when two things move in the same direction at the same time; this can also be called positive correlation, procyclical, or just cyclical. 

An investor could look at it the opposite way too: when Unemployment is going down then Real GDP is going up.

The NBER looks at this closely when deciding if we are in a recession. If Real GDP is declining, but Unemployment is not changing then they may not call it a recession. 

There are indeed times when things that are highly correlated (like Real GDP and Unemployment) do not move “correctly.” This is always odd for economists and investors, and you need to pursue the reason (or at least a theory) why. 

Remember, the economy is very dynamic and complex, so there are many things that are usually true but not always true. Economists are just gathering information and painting pictures in order to understand the economy. Not every painting from economists is photo-realistic. 

There are in-between periods too, such as 2024, when the painting looks more like a Monet. You can tell what it is, but there are not a lot of clean edges. What you don’t want is a Jackson Pollock painting (economically speaking), such as the lead-up to GFC (Great Financial Crisis of 2007-2008) that wasn’t understood and turned into a crash. 

As an investor, you want procyclical investments when the economy is good (restaurants, airlines, auto-makers) and countercyclical investments (discount retail and alcohol) when the economy is bad.

So before the NBER declares a recession they look for: a decline in total GDP, a decline in income, a decline in employment, and a decline in trade. So they want to see that the economy is bad, or down in many regards — and we would tend to agree with this. The term recession should be reserved for when many bad things are happening within the economy. Otherwise, people might think every bit of bad news is a recession, which reduces their participation in the economy (less iPhones, restaurants, and Disney+) which then would lead to more problems — because they got spooked.

Note: What works really well is to have a teammate that can understand, stay the course, and make some basic pivots along the way. If you can’t do it yourself, we recommend Arena Investor investment management services.

You can be in a growth recession too

What does that mean? It means you were growing at 3% but are now growing at 2.5%. See how you are growing slower now? The growth (growth rate) contracted. But you are still growing. It is like the kid in middle school who hits a growth spurt and grows 12″ in a year versus the kid who grows 6″ in a year. Don’t worry, they are both healthy. 

Look at the data for yourself, hear what is actually happening, and don’t just listen to panicky news. Growth rate contractions happen. Should we look at why? Yes. Should you panic? No. In fact, you should never panic. 

The moral of the story

Continue to learn so you can decide for yourself what is good and bad. (Hint: there are opportunities in every market.)

What is an economic depression?

So we know what contraction is, and we know a recession is more than a Real GDP contraction, but what is a depression? Simply put, an economic depression is when you are in a recession for a long time (years and years). 

Since The Great Depression economists have been steadfastly dedicated to preventing another depression! Heck, we already covered Keynes and his effort to develop macroeconomics because the world was suffering through The Great Depression. (There are other great contributions from others too in economics.)

Economies have momentum and inertia

The momentum is how much change is happening (a lot of upward or downward change in the Real GDP for instance) and inertia is the economy’s resistance to change. This does not mean that when government takes action it is useless; instead, it means that a train slows down slowly. You won’t get a barge to turn on a dime. You can put rudder inputs in, and a turn will start, but it might not respond like a fifth generation military fighter jet.

You may think you want quick changes, but you don’t. What you want is small inputs that are on-time from the government so you don’t get a runaway train in the first place — so you don’t need to do a 180 degree turn with an aircraft carrier — but instead a little left or a little right to stay on target.

As instructor pilots say, “small corrections sooner.” The US government has been pretty good at this compared to the rest of the world, especially when you consider how big, complex, and dynamic our economy is. But let’s stay vigilant.

Note: Economic inertia that is quite resistant to change is called persistence.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

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    We’re the Guide.

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Key Economic Reports

• Today's spotlight is on the Personal Consumption Expenditures (PCE) price index, which will provide insights into inflation trends. Investors are keenly watching for any signs that might influence the Federal Reserve's future rate decisions. Expectations are for a slight uptick in the core PCE, which could either bolster or challenge the narrative of a soft economic landing.

5 Key Earnings Reports

• Dell Technologies reported earnings that beat expectations, signaling strong demand in enterprise solutions.
• Autodesk also outperformed, reflecting robust growth in software subscriptions.
• Lululemon saw a dip in comparable sales, but overall earnings were solid, indicating continued consumer interest in athleisure.
• Marvell Technology and MongoDB both reported earnings that surpassed forecasts, with MongoDB particularly shining with a significant beat, suggesting strong adoption in the database market.

The Fed

• While there's no direct Fed action today, the PCE data will be crucial for setting expectations for the next Fed meeting. The market anticipates a rate cut in September, and today's data could either reinforce or challenge this expectation.

Stocks

• U.S. stock futures are up, buoyed by positive earnings and anticipation around economic data. The tech sector, in particular, seems to be finishing the week on a high note, with several companies reporting robust results.

Bonds

• Bond yields might see some volatility with the PCE data release. If inflation shows signs of reacceleration, yields could rise, affecting bond prices inversely.

Crypto

• Cryptocurrencies like Bitcoin and Ethereum have been reacting to broader market sentiment and regulatory news. Today, with focus on U.S. economic health, crypto markets might see increased volatility if the data surprises either way.

Gold

• Gold prices are slightly down, reflecting a cautious market ahead of the PCE release. A higher inflation reading could push gold prices up as a hedge, but for now, gold is steadily treading water.

Real Estate

• Real estate markets continue to watch interest rate movements closely. Any indication of prolonged higher rates could dampen real estate activity, while hints of rate cuts might spur more buying interest.

Geopolitical Aspects

• Global tensions, including trade talks and geopolitical conflicts, continue to influence markets. Today, markets are relatively calm on this front, with no major new developments reported that could sway investor sentiment significantly.

Worldwide News

• Europe is dealing with its own economic recovery, with eyes on how the U.S. economic health might impact global trade.
• Asia has been navigating through post-COVID recovery, with tech exports from countries like South Korea and Taiwan influencing market sentiments.

Simple Explanations of Key Concepts to Level Up Your Financial Education

• PCE Price Index: This measures the prices paid by consumers for goods and services, giving a broad view of inflation. Think of it like a shopping cart price check for the whole country.
• Earnings Reports: Companies announce how much profit they made in the last quarter. If they make more than expected, their stock might go up because investors are happy.
• The Federal Reserve (Fed): They control interest rates, which affect borrowing costs. Lower rates can make borrowing cheaper, potentially boosting spending and investment.
• Stocks: When you buy a stock, you're buying a piece of a company. If the company does well, your stock might be worth more.
• Bonds: These are like IOUs from companies or governments. They pay you interest over time, but if interest rates go up, new bonds might offer better rates, making old bonds less attractive.
• Crypto: Digital currencies like Bitcoin. They're not controlled by governments and can be very volatile, meaning their prices can swing a lot.
• Gold: Often seen as a safe investment when economies are shaky. It's like a financial insurance policy against economic downturns.
• Real Estate: Buying property. Prices can go up if lots of people want to buy, or down if interest rates rise, making loans more expensive.
• Geopolitics: How countries interact can affect markets. Wars, trade deals, or sanctions can lead investors to move money around for safety or profit.

This overview should help you navigate today's market landscape, whether you're a seasoned investor or just starting to understand the financial world's intricacies.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

‍Market Recovery: The Bounce Back

The week began with a recovery from a previous drop, where the S&P 500 saw a significant rebound, up by over 6.5% from its August lows. This recovery was led by sectors that had previously taken the hardest hits, particularly technology. The Nasdaq, home to many tech giants, surged over 8%, showcasing the market's resilience and optimism.

Inflation: The Cooler Cousin

Inflation, which had been the party pooper for a while, seemed to have taken a chill pill. Recent data indicated a cooling off, with numbers coming in lower than expected. This was good news for everyone, suggesting that the Federal Reserve might not need to keep interest rates as high, potentially leading to rate cuts sooner rather than later.

The Fed's Next Move: A Crystal Ball Moment

The market's mood was heavily influenced by the anticipation of the Federal Reserve's actions. With inflation showing signs of easing and employment data suggesting a softening labor market, the consensus was leaning towards the Fed beginning to cut rates possibly as early as September. This expectation was a significant driver behind the market's positive momentum.

Sector Spotlight: Tech Leads the Charge

While the market saw broad gains, technology stocks were the stars of the show. They not only recovered but led the market's upward trajectory, indicating a strong vote of confidence in growth-oriented investments.

Economic Indicators: The Good, The Bad, and The Ugly

• Employment: A slight uptick in unemployment hinted at a cooling labor market, which might give the Fed more room to maneuver on rates.
• Retail Sales: Up by 1%, suggesting consumer spending was still robust, despite inflation pressures.
• Gold and Crypto: Both saw gains, with gold shining as a safe haven and crypto riding the wave of optimism

Looking Forward: Diversification is the New Black

The theme for the next phase might be diversification. After a period where tech giants dominated, there's a shift towards a more balanced market where both growth and value stocks could perform well.

Conclusion

Last week's market movements were a blend of recovery, anticipation, and economic data that painted a cautiously optimistic picture. For the average person, this means your investments might have had a good week, but remember, the market's dance card is always full of surprises. Keep an eye on the Fed's decisions, as they could set the tone for the next big moves in the market.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.