Tune Out the Noise; Focus on Facts

Question:

Is it a bull or bear market? Is inflation evaporating or sticky? Is the economy surprisingly robust, or are we nearly in a recession? I’m getting all this contradictory information from the news media; what’s the real story and what should I be thinking about?

Answer:

All the above. Welcome to 2023, the year you should probably stop reading headlines.

One definition of a bull market is when stocks are 20% higher than their last low. Right now, the S&P 500 is about 25% higher than last September. That seems like a bull market, right? But a closer look reveals that the rally has been concentrated in a handful of technology stocks, and we have yet to see signs that economic growth and corporate earnings are backing this rise in stock prices. To be fair, the rally has recently broadened out to more stocks, but investor sentiment is a fickle thing. If we don’t see hard data to support investor expectations, the bear could come out of hibernation.

Inflation is always a difficult subject. How high it is often depends on how it’s measured. Some look at an inflation index that includes all consumer goods (currently 3%). Others prefer looking at core inflation, which strips out food and energy (4.8%). Inflation’s impact is also very personal. If you spend a large portion of your monthly income on food and gasoline, inflation stings. If you live in the mountains of Colorado, your air-conditioning bill in the summer is far less than someone living in Hilton Head, S.C., and vice versa in the winter. With all that said, inflation is trending down, but it’s sticky in that it’s not falling nearly as fast as many would like.

Finally, the economy is slowing in an environment with sticky inflation and higher interest rates, all of which AMG anticipated. However, the job market has remained surprisingly strong, with the unemployment rate relatively steady at 3.6%. Recessions almost always are accompanied by rising joblessness, so it’s surprising that the risk of a recession is very real. It’s possible Americans might see a small economic contraction while the job market remains strong.

Still confused? Most investors are. At AMG, we ignore the media noise and focus on the effect higher interest rates, low unemployment, and high but falling inflation can have on our clients’ investments. We think you should too.

HOW AMG CAN HELP

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