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RBG Wealth Weekly

July 8, 2022

Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 


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Articles of the Week

Investing in Equities Before a Recession


“I don’t know if there will be a recession in the US, but chances are rising so let’s assume there will be… If that’s the case, investors need to be on the lookout for signals that are not as stale as employment and GDP. Historically, Purchasing Managers’ Index (PMI) surveys have been the best leading indicators. We expect these surveys to continue falling, but will be watching closely for turning points.


Another equity market signal: in past cycles, equity markets did not bottom until long term Treasury yields were declining, or at least until they stopped rising.”

 

The latest Eye on the Market had an interesting section on the potential opportunity cost of trying to market-time an economic recession. The stock market tends to be an economic leading indicator. In six of the major post-World War II recessions, we have seen market bottoms while the economy continued to get worse.

 

In those cases, on average, the stock market bottomed approximately four months before the economy (as measured by GDP). Investors would have missed an average of 19.3% in equity market returns if they waited for an economic bottom and 31.7% if they waited for the economy to start rising again.

 

I should note that the second equity market signal mentioned – long-term Treasury yields – peaked at 3.49% on June 14th and closed at 3.10% on Friday (see the graph of the week below).

Another Strong Jobs Report


“The headline monthly jobs number was above expectations (+372,000 vs. +250,000); however, the previous two months were revised down by 74,000 combined. 


The headline unemployment rate was unchanged at 3.6%. 


Look at these highlights:

  • [The headline unemployment rate] is below pre-recession levels, and the lowest level on record (started in 1994).
  • There are now fewer permanent job losers than prior to the recession.
  • There are fewer part-time workers, for economic reasons than prior to the recession.
  • However, there are still 524 thousand fewer jobs than prior to the recession.


Overall, this was another strong report.”

 

Friday’s jobs report was maybe the most anticipated financial release of the holiday-shortened week. The strong report was a nice surprise, and hopefully, provides a lift to consumer sentiment. However, it also likely provides the Federal Reserve runway to continue hiking interest rates at an aggressive clip. The stock market seemed to have mixed feelings about it, but ultimately, closed flat on the day.

In Defense of Dollar Cost Averaging


“It’s easy to say ‘Just Keep Buying’ when stocks are going up. But what about when they are going down? What about when consumer prices are going through the roof? What about when there is increased economic and geopolitical uncertainty? Not so easy now, is it?


Don’t fear though, because I am here to defend dollar cost averaging as the greatest investment approach ever invented for the individual investor. How so? Because I’m going to show you how it held up during one of the worsts period in U.S. stock market history—the mid 1960s to the early 1980s. And if it worked there, it can work anywhere.”


I enjoyed this historical stress test of the potency of dollar-cost averaging (i.e., gradually, consistently investing in the market) throughout a prolonged period of market stress including recession and stagflation. In my opinion, we’re not headed for a rehash of this period, but the subject has been broached. Investing during market stress, even in an inflationary period, can preserve purchasing power and provide positive real returns.

Read More

Graph of the Week

Interest rates and inflation are the two leading indicators and driving forces for capital markets in the second half of the year. Long-term interest rates (reflecting long-term economic and inflation expectations) have fallen from recent highs, while short-term interest rates (reflecting Federal Reserve policy expectations) haven’t fallen as much. The result is a mildly inverted yield curve and continued economic worries.


We need moderation on all fronts to lead us out of the tunnel in the second half of 2022.

Tweet of the Week

The price of crude oil is down almost $20 from its year-to-date high of $124, and thankfully, retail gas prices are very slowly starting to subside. We took the elevator up and now the stairs down. 

Thanks for reading. Have a great weekend!

Guidance for today. Growth for tomorrow.

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Tim Ellis, CPA/PFS, CFP®

CIO and Wealth Advisor

RBG Wealth Advisors

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