Under Pressure

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

Markets are up and down this week as investors try to determine what's next for the economy with multiple pressures playing a game of tug-of-war.  Certain economic indicators point to an already existing recession, while others suggest a mild recession.  As I write this week's musings, a song by Queen (accompanied by David Bowie) popped up in my music library on "shuffle."  That song, "Under Pressure," has a unique and wild story.  Queen and Bowie just happened to both be in Switzerland in the Summer of 1981 recording music for separate albums.  They conducted a "jam-session" while there where the initial music for "Under Pressure" was improvised.  Queen bass player, John Deacon, came up with the initial two-note riff for which the song (and another song) became famous.  According to Deacon, all five artists contributed to the lyrics, with Freddie Mercury as the lead contributor.  The song was a #1 hit in the U.K. for Queen and Bowie, but only reached #22 in the U.S.  However, in 1990, Vanilla Ice sampled the two-note riff from "Under Pressure" for his #1 hit "Ice Ice Baby."  While details are fudgy, it appears Ice never cleared permission to use the riff and was forced to reach a settlement with Queen & Bowie.

Under Pressure                                                  Ice Ice Baby

"Pressure pushing down on me                           "Something grabs a hold of me tightly
Pressing down on you, no man ask for                Flow like a harpoon daily and nightly
Under pressure that burns a building down        Will it ever stop?" Yo, I don't know
Splits a family in two                                           Turn off the lights, huh, and I'll glow
Puts people on streets"                                         Ice, Ice, Baby"

Unlike Vanilla Ice, we can give credit to our current market and economy to the Fed and over-indulgent fiscal spending.  However, we might be getting closer to the end of our economic ills, depending upon whether the U.S. consumer can hold out through year-end.

Here's what we're seeing so far this week...

Pressure, Pushing Down On Me, Pressing Down On You.  Markets are feeling pressure from recession fears and further Fed rate hikes.  Last week, we detailed how the current recession is not stacking up the same as other historical recessions.  The past two recessions had an unemployment rate 2-4x the current environment.  Gross Domestic Product has held up much better this year than in previous recessions.  This week, another indicator of recessions has been the inversion of the 10-year Treasury Yield with the 3-month T-bill Yield.  When the former drops below the latter, it has been a more immediate sign of recession as opposed to the oft quoted 10-year & 2-year inversion.  On Tuesday of this week the 10-year and & 3-month briefly inverted.  As you can see from the table, in 1987 and 1990, there was no inversion of the 10-year & the 3mth prior to recession.  However, in the 2001, 2008, and 2020 recessions, the inversion occurred 9 months or more prior to the beginning of those recessions.  The average decline of the S&P 500 Index after those inversions was -38.2%.  What's puzzling about our current predicament is that the inversion occurred 10 months into the current recession and the S&P 500 is already down 25.4% from peak to trough in 2022.  What can we take away from this phenomenon?  It's uncertain.  Either that particular indicator is "broken" or there is more pain on the way for equities.

Will It Ever Stop, Yo I Don't Know.  I won't be the first to accuse Vanilla Ice of being a talented linguist, but his words apply in this case.  Equity investors have certainly had cause to question when equities will stop selling off.  This week has been a nice reprieve after a couple of down days the S&P 500 Index is up 1.8% or so for the week.  After the market established a low of 3,636 on June 17th, the market finally closed below that on September 30th and established a new low of 3,491 on October 13th.  The Index has rallied somewhat off that new low.  Is the market beginning to look further out to 6-9 months from now?  It would appear that more market sentiment measures are suggesting that investors are looking more positively at 2023.  The number of negative sentiment indicators dropped substantially from August to September.  The net score of +14 is a good sign.  In addition, the Fear Indicator has moved from "Extreme Fear" just a few weeks ago to the upper end of "Fear" and getting close to "Neutral" status.  Dare to say, if we get to "Greed" status soon, it would be fair to say that investors are moving on from the Rate Story.  We would caution against getting too excited.  While our Wealth Protection Signal has not moved beyond a 10% cash weighting, it has also not moved lower to indicated putting cash back to work.  We are likely not out of the woods just yet.  That being said, the Atlanta Fed has adjusted their GDPNow estimate of 3rd quarter GDP from barely positive just a month ago to +2.9%.  We'll find out next week what the first print of Q3 GDP is and whether that signals the end of our "technical" recession.  

Splits A Family In Two.  With Mid-term elections around the corner, I couldn't resist highlighting one of my favorite graphs and how investors get caught in the trap of bias.  J.P. Morgan has taken some interesting information from Pew Research and charted how consumers rate economic conditions along with their political affiliation.  The graph shows how we tend to rate economic conditions, not by actual data and statistics, but by who is in the White House.  For example, as we came out of the 2001 recession, things began to improve.  However, because a Republican was in the White House, Democrat-leaning consumers viewed economic conditions poorly, while the average consumer viewed conditions more positively.  Similarly, as we came out of the 2008 Financial Crisis, economic conditions improved, yet because a Democrat was in the White House, Republican-leaning consumers had a much more negative view.  Investors ought to look at hard data and economic trends when making investment decisions, not who's on the ballot or sitting in the nation's capitol.  Regardless of what happens next month at the polls, we will recommend strategies that make sense from business/economic cycle and not based on personal bias.

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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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