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Why I’m Getting More Concerned About an Economic Slowdown

June 04, 2024

Why I’m Getting More Concerned About an Economic Slowdown

My biggest concern for this market remains that we get an unexpected economic slowdown because that’s one of the few events that can legitimately cause a material correction in stocks (meaning 20% or more), and my concern about that slowdown became stronger last week.

However, that increase in my concern wasn’t because of last week’s economic data. The Q1 GDP revision implied slower growth, but the details of the GDP report were still solid. Additionally, weekly jobless claims appear to be entering an uptrend (the first in years, perhaps) but they’re still extremely low in an absolute sense.

Instead, my elevated concern came from corporate commentary. While Q1 earnings were “fine,” they were mostly fine because U.S. companies are extremely adept at controlling costs and maintaining margins. They were not fine because of solid aggregate demand, and over the past few weeks, we’ve seen numerous companies from multiple industries post disappointing results due to a combination of underwhelming gross sales and the inability to maintain margins.

Put plainly, the number of companies citing reduced demand or a more discerning customer is growing quicklyand it’s stretching across industries. This behavior is being called “retrenching” in the financial media and it’s another signal that the economy is seeing slowing growth.

Twice in my career, I have seen investors cheer a slowdown, and both times, the Fed was not able to cut rates at the right time to prevent the slowing from becoming a broader economic contraction. That doesn’t mean they can’t do it this time, but catching a falling knife doesn’t work in real life, it doesn’t work in stock trading, and I’ve never seen it work in monetary policy.

The only caveat to all of this is the election. As I shared last week, who wins the presidency will determine our future economic temperature. So the closer we get to the election, the more we will see from stock movement. If it is too close to a call, the markets will move sideways while waiting for the result. For now, all we have is the movement within corporations and whether they can weather the slowdown in demand.  In July, we will see second-quarter earnings reports, and that data will help us determine if corporate America is still strong.

Our job will be to watch macroeconomic data and microeconomic results to tell us if (and when) the slowdown appears imminent because, at that point, it will be time to get defensive (and we will have time to do so). For now, bad is still good, so it makes no sense to materially de-risk, but we will continue to gradually move to reduce volatility in portfolios (while still maintaining long exposure) so that if we’re wrong, our investments rise with the tide—and if we’re right, we’re insulated from the coming volatility.

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