Is the Market Already Reflecting an Economic Slowdown

The word recession has been coming up a lot lately in the business media. Several prominent investment firms are now saying that there is a reasonable chance of a recession starting towards the end of this year or the beginning of next year.

There are legitimate reasons for concern: Inflation, the Federal Reserve (Fed) raising short term interest rates and no longer buying bonds, a shortage of workers in many industries, continued problems in the supply chain and a war in Europe.

That is a fairly long worry list. And we don’t know how any of these issues are going to be resolved, but we never know how the future will unfold.

Given that economic concerns seem to be on investors’ minds more recently, we thought it might be helpful to see if the market has already reflected some of these concerns.

Below is a chart of the Dow Jones Home Construction Index so far this year. It reflects the performance of many of the large public homebuilders and the companies that supply many of the homebuilding products. As you can see, it has dropped already dropped about 30% this year.

One of the reasons homebuilder stocks are having a tough time this year is the increase in interest rates in mortgage rates, which are a function of an increase in the 10- year Treasury rate. We talked about the bond market anticipating interest rate increases by the Fed, and the chart below shows the change in the 10 -year Treasury rate this year. Obviously the bond market already reflects some of the anticipated interest rates hikes from the Fed.

Many technology stocks have had a rough year also. Over 50% of the stocks in the NASDAQ composite index are classified as technology stocks. As you can see, it is already down 20% this year.

So hopefully these few charts show that several parts of the market already reflect concerns that are being discussed by investors and the financial media. This doesn’t mean that markets can’t go down further or that interest rates can’t go up more. But the markets are discounting mechanisms, reflecting the concerns and expectations of all investors.

More importantly, the key to success as an investor is not the ability to predict market bottoms, market tops, recessions, interest rate moves, geopolitical events, etc. Recessions will occur, expansions will occur, interest rates will go up and down, new industries that we haven’t even thought of will be created, old industries that we thought were solid will struggle.

The key is to have a strategy that provides you the best chance to reach your unique goals and the discipline to stick with that strategy. Simple, but not always easy. Sticking with a sound discipline and strategy regardless of what news is flashing on tv, what crypto currency young people believe is the next gold rush, what doomsday scenario we just got in an email, or what fortune our neighbors have discovered that can’t go wrong, is difficult at times.

I believe Warren Buffet says it best in his quote that states “The most important quality for an investor is temperament, not intellect.”

Thank you as always for your trust in us. Please do not hesitate to call us with any thought, question or concern you have as we continue to build towards your goals.


Disclosure: The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Beach Foster and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.