It is FTM’s belief that the United States is now in an earnings recession. Now, it is fair to argue about that statement. We haven’t officially recorded even one negative quarter in S&P 500 earnings growth- let alone two. I have always had an issue with the negative two quarters rule about defining recessions. Much of this is because by the time two quarters of data are booked and in print- it’s a little too late. Capital markets are forward looking. It is my observation, based on over twenty years of observing data, that we are in an earnings recession.
There is a small probability that I am wrong. GDP could suddenly do an about face and turn higher. The government could come out and say, “you know, we don’t want to collect any taxes from corporations this year.” The employees could elect to have companies to pay them less this year. The US dollar could precipitously fall in second quarter and that would help. Overall, the chances of any of these things happening is quite low.
I believe in mean reversion. I believe in cycles. I believe that corporate profits are mean reverting which is why prices mean revert. You see, it is profits that drive price over time and and a company’s profit stream has a life cycle. Profit life cycles have varying lengths, based on a variety of reasons, from the way the companies are financially structured to the type of customer who will purchase their products and services.
So, let’s just say we are in an earnings recession that lasts the remainder of 2019. Now what? Markets will become very Darwinistic- survival of the fittest. As I stated in the previous paragraph, not all industries are the same! It is critical to your investment success that you begin to understand what factors perform best in an environment. For example, I’d be spending time figuring out which companies are more stable growers versus more cyclic growers (hint- you want stable growers). Earnings recessions are usually a precursor to economic struggles. Not always, but usually. If the economy is struggling, the Fed will do what they always do and begin to monkey with (as in lower) interest rates. We have already seen equity bond proxies like REITs and Utilities perform quite well versus the broader group of stocks. Cash and short-term bonds could be an answer to out performance.
Staying the course is usually a poor decision. I know, doing something for many people is hard. It is fraught with all kinds of baggage and F-words (uh, I meant FEAR- what’d you think?). Fear of being wrong is usually at the top of the list. Speaking of thinking, now is the time to do that. If you are saying to yourself “if I change up my portfolio, how do I know when to change it back?” That statement, which is a brilliant one, should punch you right in the nose. It screams that you have no process. There is a better way, a more consistent way, to manage your hard earning capital. If we wait to see the robins to tell us spring is here, well, you missed it!
Cheers,
P. Franklin, Jr., CEO
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.