No Need To Worry, Yet

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

There's a lot of worry about recent stock market action and renewed fears of a recession happening this year.  However, if we look at the backdrop of information, things don't look so scary.  Hence, the inspiration for this week's musings is the 1985 movie "Teen Wolf," starring Michael J. Fox.  This movie was a success at the box office by 1985 standards.  The film had a paltry budget of just $4 million, but grossed over $33 million at the box office.  In addition, this film has inspired a sequel, two television series, and a recent film that continues the story of one of the television series.  Here's some trivia to enjoy about the film:

• Michael J. Fox disliked this film so much that he refused to return for the sequel.  He is reported to have said in an interview about missing time on the set of "Back to the Future" because of his commitment to "Teen Wolf," "Steven Spielberg's down the street making great movies and I'm playing a werewolf."
• The basketball players in the film tried to play the on the court scenes unscripted.  It didn't go well.  According to the film's director, Rod Daniel, "Somewhere in a vault is about an hour of the most embarrassing sports footage ever taken."
• The movie was filmed in a near record 21 days.
• If the "teen" actors seem a little old in the movie, it's because they were.  At the time of filming, Michael J. Fox was 23.  Stiles, played by Jerry Levine, was 27.  Chubby, played by Mark Holton was 26.  Mick, played by Mark Arnold was 27.

Here's what we've seen so far this week...

Coach Finstock Says Not To Worry.  The bears have come out swinging lately, touting all sorts of data to justify a recession on the horizon.  We're not in that camp yet, as there is plenty of fundamental data to support more upside in equities.  One of my favorite characters from the silver screen is in "Teen Wolf" - Coach Finstock.  He's a happy-go-lucky guy who's probably not the best motivator as a coach.  However, his iconic line comes about midway through the movie as Scott, played by Fox, is struggling with his new-found talent as the wolf.  As Scott recognizes the team is becoming weary of the wolf, he asks Coach Finstock, "What's their problem?"  To which the Coach offers this gem of a zen moment:

"Let me give you a little advice.  There's three rules that I live by:  never get less than 12 hours sleep; never play cards with a guy who has the same first name as a city; and never go near a lady who's got a tattoo of a dagger on her body.  Now you stick with that, everything else is cream cheese."

If only investing were that simple.  Last week, investors were surprised by the sudden downgrade of the U.S. credit rating by Fitch.  This week, Moody's decided to get in the fray by downgrading several regional banks by one notch and putting some larger banks on notice.  The downgraded banks include M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and Bank of Oklahoma.  The larger banks "put on notice" for a potential cut were Bank of New York Mellon, US Bancorp, State Street, and Truist Financial.  I don't want to white-wash the rating agency's actions - it is a concern.  However, it's worth noting that in June of this year, all 23 banks that went through the Federal Reserve's "stress tests" passed and that was after March's Banking Crisis.  In fact, these banks held aggregate equity capital in reserve at a pace of 1.7x the minimum regulatory requirement.  Among those banks tested were - you guessed it - M&T Bank, Bank of New York Mellon, State Street, US Bancorp, and Truist Financial.  These were among Moody's list of banks either downgraded or put on notice.  I find the timing of Moody's downgrades a little suspect, given Fitch's downgrade of the U.S.'s credit rating just last week.  However, if we look at bank deposits since the Banking Crisis, there's been improvement since the trough in April of this year (+1%).  At this point, we have to remember to put things into a greater context.  Since the U.S. downgrade last week, the S&P 500 Index is down only 2.6% (before today's trading), but is still up more than 17% year-to-date.  In addition, the VIX is still below average and has come down more than 54% since the peak in 2022.  While we can be concerned about some of these recent announcements, that doesn't mean it's time to abandon equities.

Coach Finstock Says, When In Doubt, Just Move Forward.  I find entertainment in reading articles written by seemingly perma-bears who always find the glass half-empty.  A balanced approach is usually the right one.  All of the data has to be examined before making rational decisions, not just the sensationalized information.  It reminds me of another great scene from "Teen Wolf" when Scott is just beginning to discover there's something different about himself and he seeks Coach Finstock's advice.  The uber-wise coach replies:

"Look Scotty, I know what you're going through. Couple years back, a kid came to me much the same way you're coming to me now, saying the same thing that you're saying. He wanted to drop off the team. His mother was a widow, all crippled up. She was scrubbing floors. She had this pin in her hip. So he wanted to drop basketball and get a job. Now these were poor people, these were hungry people with real problems. Understand what I'm saying?"

At this point, Scott asks, "What happened to the kid?"  To which Coach Finstock bluntly says, "I don't know.  He quit.  He was a third-stringer.  I didn't need him."  In honor of Coach Finstock's attempts at life lessons, let's look at the Misery Index.  As a refresher, the Misery Index has been calculated since the 1960s and combines Inflation with Unemployment to determine the general "misery" of Americans.  After yesterday's CPI print, the Misery Index stands at 6.7, which is just off the 2-year low set last month and well below the historical average of 9.25.  You can see from the graphic that recessions don't typically begin when the Misery Index is in steep decline.  This is helping the consumer as inflation is much lower than 18 months ago, there are plenty of jobs available (something we covered in last week's musings), and wage growth is now out-stripping inflation.  This week, we found out that Consumer Credit jumped in June by $17.8 bil after slumping in May.  Of that number, nonrevolving credit jumped the most, which are those accounts where the consumer borrows a set amount of money (i.e., principal).  So consumers do not appear to be loading up on credit card debt, but rather, buying larger items that have a lower overall interest rate and will be paid off over time.  The bears, on the other hand, made much of the fact that consumer credit reached the staggering number of over $1 trillion for the first time in history.  Well, this is a relative figure.  First, the number of working-age U.S. consumers who qualify for a credit card happens to be at the highest point in history.  There are approximately 191 million credit card users in the U.S.  Second, when we look at credit card debt relative to bank deposits, consumers are in much better shape than they were in 2020 and 2008.  Financial conditions overall just are not at the level that would indicate a recession is imminent.  The bears keep mentioning data points that, when taken by themselves, could be worrisome, but when analyzed holistically, do not indicate trouble immediately ahead.  The Fed's National Financial Conditions Index is at -0.32, which means conditions are loose.  In fact, while bears have been pounding the table, the Index has improved over the last 4 consecutive weeks.  Financial conditions will weaken at some point and markets will pull back.  For the time being, however, investors should stick to their investment plans and wait until there are more clear danger signals present.

Coach Finstock's Rules for life...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. 

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