Our Insights

Bad News is Good News

Can we please just get some bad economic news? Given the markets’ hyper focus on inflation data, we are entering a prolonged period of bad news is good news. Particular attention is being paid to any employment numbers. These run the gambit of weekly jobless claims to job postings. What the markets want to see is any sign of weakness, which then may lead to a Fed pause or pivot. Currently, the job statistics have been very sticky with almost no negative surprises, even in the face of significantly rising rates. It could be that employers are still extremely cautious about layoffs given the difficulty of finding both skilled and unskilled labor over the last 2 years. This is what is making the Feds job so hard at the moment. We really need a consistent level of bad news for a protracted period of time. Where will it show up first? Our best bet is in the job openings number, which recently shrunk by 1 million in August. Should this trend continue we could see an increase in the unemployment rate. Another small sliver of bad news is the most recent Institute for Supply Management Companies survey, which found more firms were adopting hiring freezes, resorting to temporary help or curtailing plans to fill some jobs. These faint hints of negative news may very well be the tip of the spear that will eventually result in a Fed pause.

In addition to some slight weakening in employment data, there are other signs of “bad” news which give us hope for a Fed pause. The most recent Consumer Confidence report saw a significant drop from 107.8 to 102.5 after back to back gains in the previous two months. Americans are feeling the pressure from rising rates, dwindling savings and increasing prices and that’s manifesting itself in weaker confidence. On the manufacturing side, the September Purchasing Managers Index unexpectedly fell to 50.9, pointing to the weakest factory activity since the pandemic induced contraction of 2020.

Counterbalancing this spate of weaker economic news is a slew of positive data points that will probably keep the Fed on its tightening path for the foreseeable future. Actual employment numbers, job openings, and wage growth are still very strong. The most recent GDP release came in at plus 2.6%, which exceeded expectations due to increased consumer spending. Retail sales are stable and Q3 earnings have shown tremendous resilience across most sectors excluding housing and technology. Given the level of stimulus still in the system, combined with robust corporate and consumer balance sheets, it’s going to be very tough for the Fed to bring down inflation. We are hoping they pause at some point regardless of the data to absorb the potential lag effect of such strict monetary policy, but history tells us they overshoot most of the time.

How does all this translate into our portfolio positioning? We are still overweight cash and short duration fixed income. We are also selectively changing the mix within our large cap equity strategy to take advantage of price dislocation. Any security that is sensitive to interest rates has seen significant price erosion. This would include large cap growth equities, REIT’s & utilities. Whenever the Fed pauses these groups will have tremendous outperformance relative to the overall market. Please call or email us with any questions you may have.

Ned Abbe
Co-CIO
Jess Ellington
Co-CIO

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