Market timing does not work even when you know a recession is coming
Christopher Norwood • September 19, 2022

Market Update

The S&P 500 lost 4.8% last week to close Friday at 3873.33. The Nasdaq fell 5.5% and the Dow Jones fell 4.1%. A worse-than-expected inflation number kicked off the selling Tuesday morning. The indices had their worst day since 2020. The CME FedWatch website is now estimating an 18% chance of a 1.00% rate hike. The probability of a 75-basis-point hike stands at 82%. Market strategists are raising their peak fed funds rate forecasts to as high as 5% in some cases. Billionaire investor Ray Dalio of Bridgewater Associates believes the Fed will need to raise the funds rate to between 4.5% and 6%. He is also predicting a major recession because of the rate hikes.


Bond yields moved higher last week in response to the inflation number. The two-year rose to 3.91%, its highest level since 2007. The 10-year rose to 3.46%. The average 30-year fixed mortgage rate rose to 6.02% last week, according to Freddie Mac. It is the first time the average 30-year fixed rate has been above 6% since 2008. Most yield curve spreads are inverted with the 2yr/10yr inversion at negative 0.45%. The 3m/10yr yield curve hasn’t inverted yet but is close. The 3m/10yr curve is positive by a mere 0.1%. A recession has always followed when the 3m/10yr inverts. The 3m/10yr is likely to invert in the next few weeks as the bond market prices in more Fed rate hikes. Yield curve inversion and recessions aren't a random correlation. Banks can’t make money lending when their borrowing costs are higher than the interest rates they charge. Yield curve inversion means fewer loans and less money creation. It is the decline in money creation that leads to less economic activity and in turn recession.


FedEx fired a recession warning shot on Friday. It fell 21.4% after pre-announcing poor earnings and withdrawing its FY23 guidance. FedEx and UPS are leading economic indicators. Falling shipping volumes are a sign of falling economic activity. FedEx reported that, “Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.”


A word of caution to clients:


Market timing does not work. Knowing that we’re likely in a recession or soon will be doesn’t change the fact that market timing does not work. Also, we don’t own the market. We own individual stocks, many of which are already trading at 7x to 13x earnings. We also own gold, fixed income, emerging markets, and real estate in our client portfolios. We have no intention of adjusting our client portfolios. We are continuing to look for good companies on sale. Bear markets are a wonderful buying opportunity.


And finally, about market timing, there is this to consider…


Many market strategists, hedge fund managers, and mutual fund managers are expecting the stock market to fall further. In fact, BofA found in a recent survey that a record 52% of respondents are underweight stocks. The bank also found that a record 62% of respondents are overweight cash, according to the bank’s global fund manager survey. The bank’s survey found that the number of investors expecting a recession has reached the highest level since May 2020. The U.S. stock market bottomed in March 2020. Let that sink in for a moment. The S&P 500 bottomed two months before investors’ peak pessimism about the economy in May of 2020. The S&P 500 was up 25% from its March 2020 low until the middle of May 2020. A lot of pessimistic investors missed a big move off the March 2020 low. (The BofA survey included 212 participants with $616 billion under management in the week of September 8th.)


Meanwhile, Tuesday’s trading saw fewer than 1% of the stocks in the S&P 500 finish higher, according to Sundial Capital Research’s Jason Goepfert. A lopsided up/down result like Tuesday’s has happened 28 other times since 1940, according to Goepfert. The S&P 500 has gained an average of 15.6% over the following 12 months. The index was higher one year later 79% of the time.


Extreme levels of pessimism often lead to short-term rallies. We could be close to that oversold rally now. Money managers are underweight stocks and overweight cash. It wouldn't take much positive news to start a stampede back into stocks. Money managers can't afford to be left out when markets are moving higher. It could cost them their jobs. A further decline to around 3,000 to 3,200 after an oversold rally is likely. That last assumes we do experience a recession in the next two to three quarters. A new bull market from the 3,000 to 3,200 level starting next spring wouldn't be surprising. The stock market would be reacting by then to a Federal Reserve that has begun to talk about easing once again.


What should investors do in the meantime? Maintain their strategic asset allocation. Maintain their investment discipline. Don’t try to guess what the stock market will do. For its part, Norwood Economics will continue to look for good companies on sale.


Economic Indicators

The NFIB small-business index rose to 91.8 in August from 89.9 the prior month. Core CPI rose 0.6% in August, faster than the 0.3% the prior month and well above expectations of a 0.3% increase. Core CPI rose 6.3% year-over-year in August up from 5.9% the prior month. The Cleveland Fed’s median CPI rose a record 6.7% in August from a year prior. The Cleveland Fed’s modified CPI drops outliers to better measure the underlying trend.


The UMich consumer sentiment index rose to 59.5 in September from 58.2 the prior month. It is a five-month high. The UMich 5-year consumer inflation expectation survey was 2.8% down from 2.9%. One unexpected scenario that nevertheless could happen is a more rapid decline in inflation than strategists are now expecting. The heavy U.S. debt load and a Fed that is shrinking its balance sheet are two catalysts that could drive a rapid decline in inflation. There is also data to support that unexpected scenario. The UMich 5-year consumer inflation expectations number, five and ten-year breakeven inflation rates, the ICE BofA spread, and the long-end of the yield curve all point toward lower inflation. The stock market would rally hard once investors began to realize that inflation was subsiding.


Investing

One piece of data that doesn’t jibe with an impending recession is worth mentioning. The ICE BofA U.S. High Yield Index Option-Adjusted Spread peaked in early July at 5.99%. It is currently 4.77%. The spread is an indication of the bond market’s expectations for high-yield debt. Spreads widen when economic activity slows. Spreads widen when economic activity slows because of increased credit risk. Credit risk increases because businesses aren’t as profitable and may have more trouble servicing debt. The spread widened to 10.18% in September 2001. It widened to 19.88% in November 2008. The spread hit 8.77% in March 2020. The ICE spread is showing no signs that bond investors are expecting a sustained or severe decline in economic activity, at least not yet.


Regards,


Christopher R Norwood, CFA


Chief Market Strategist

The Jobs Report Friday Could Spark a Rally or Sell-off

By Christopher Norwood • September 2, 2025
Executive Summary The S&P 500 finished down 0.1% at 6,460.26 last week The S&P is up 9.8% on the year. Industrials and Communication Services are leading the way Personal income rose in line with expectations for July, climbing 0.4% up from 0.3% the prior month A weak payroll number on 5 September means a Fed rate cut on 17 September Unemployment is expected to rise, but it is still low relative to history Wage growth close to 4% will make it hard for inflation to fall to 2% The predictions market has the odds of a recession at 8% The ICE BofA US High Yield Index spread is near all-time lows A bear steepener is increasingly likely. A bear steepener is when the yield curve falls at the short end but rises at the long end

One of Financial Planning's Most Important Inputs is the Expected Average Inflation Rate

By Christopher Norwood • August 25, 2025
Executive Summary The S&P 500 rose 0.3% last week to close at 6466.91 The CME FedWatch tool initially raised the chances of a September rate cut to 84.7% The stock and bond markets opted to buy Fed Chairman Powell’s Friday morning speech Investors now seem certain that the Fed will start cutting again The current five-year breakeven is 2.48% The 10-year breakeven is 2.41% The core Consumer Price Index (CPI) is 3.1% Disinflation appears to be over as the inflation rate is no longer falling The St Louis Fed’s Financial Stress Index is negative 0.8153. A negative number means below-average financial market stress The real 10-year interest rate is falling. Money is getting cheaper. The Fed’s balance sheet is shrinking, but is still 22% of GDP An indebted economy can’t withstand high interest rates  The Stock Market

Overvaluation is a Poor Market Timing Tool

By Christopher Norwood • August 18, 2025
Executive Summary The S&P 500 rose 1.01% last week to finish at 6,449.80 The stock market keeps hitting new highs Market strategists are expecting earnings growth to accelerate in 2026 Margins remain near record highs Corporate profit margins will likely take a hit from tariffs Passing tariff costs on to the consumer means raising prices Core CPI rose by 0.3% in July The PPI jumped 0.9% last month, the largest monthly increase in more than three years Buffett says it’s dangerous when the market cap rises to more than 140% of GDP. Currently, the ratio is above 200%. The massive increase in the Fed's balance sheet over the last 25 years has led to financial asset price inflation The Stock Market

More Unfavorable Economic News

By Christopher Norwood • August 11, 2025
Executive Summary The S&P 500 rose 2.43% last week, climbing to 6,389.45 Interest rates didn’t move much last week The economy is slowing according to the Chicago Fed National Activity Index (CFNAI) Real final sales to Private Domestic Purchasers are slowing The Institute for Supply Management (ISM) Services index fell from 50.8 to 50.1. The index is only two-tenths away from showing contraction The employment sub-index of the Services Index report was also weak The prices paid sub-index continues to climb Norwood Economics manages its clients' diversified portfolios with a focus on the long run The Stock Market

Uncertainty Remains Extraordinarily High

By Christopher Norwood • August 4, 2025
Executive Summary The S&P 500 fell 2.4% last week to end at 6,238.01 The S&P 500 is up 6.06% year-to-date Foreign Stocks in developed countries are leading among major asset classes Foreign stocks are inexpensive compared to U.S. stocks The jobs report was weak with a 258,000 downward revision for May and June Unemployment is likely to rise if job growth doesn’t accelerate Rapid-fire tariff changes make it difficult to predict the impact of tariffs on the U.S. economy Tariffs are a tax that someone has to pay Initial jobless claims are a leading indicator Inflation remains elevated Three more chances for the Federal Reserve to cut rates this year Stagflation is a feared outcome of the new tariff regime Uncertainty remains extraordinarily high Interesting Charts The Stock Market

Forewarned is Forearmed

By Christopher Norwood • July 28, 2025
Executive Summary The S&P 500 rose 1.5% last week to finish at 6388.64 The impact of tariffs is expected to become more noticeable in the second half of the year The S&P price has outpaced profit growth The economy is still growing, but more slowly Initial jobless claims show that the labor market remains strong Gasoline demand is down, suggesting the rate of consumer spending growth is slowing The Fed meets this week but isn’t expected to change the funds rate  Two Fed governors may dissent on Wednesday. It has been 30 years since that happened The market continues to rise despite the uncertainty

Inflation Expectations Continue to Rise

By Christopher Norwood • July 21, 2025
Executive Summary The S&P 500 rose 0.6% last week to finish at 6,296.79 The 2-Year trended lower, ending the week yielding 3.88% The 10-year Treasury yield ended the week at 4.44% Investors are nervous about tariffs and their impact Tariffs are coming directly out of the pockets of the US businesses that import the goods Rising inflation expectations only increases the chances of higher inflation and interest rates Continue to buy good companies on sale

Tariff Uncertainty Still Dominates

By Christopher Norwood • July 14, 2025
Executive Summary The S&P 500 fell 0.3% to close the week at 6,259.75 We would rather own the German economy than Nvidia Consumer spending is weakening The consumer price index report will be released on Tuesday Economists believe that tariffs will cause prices to rise Economists believe that tariffs will slow the economy The jobs market is stable. The unemployment rate is low. Earnings estimates are falling more than is normal There are still good companies on sale The Stock Market

Diversification Critical in the Coming Decade

By Christopher Norwood • July 7, 2025
Executive Summary The S&P 500 rose 1.7% in a holiday-shortened week, finishing at 6,284.65 Volatility continues to fall from its elevated levels in early April The S&P is up 6.76% year-to-date. Industrials are leading the way, up 13.40% Price determines returns when buying an asset  Diversify away from a concentrated U.S. large-cap stock portfolio Job growth has been holding steady for almost a year now Analysts have been raising earnings estimates recently 90-day tariff suspension ends on Wednesday The Stock Market The S&P 500 rose 1.7% in a holiday-shortened week. The Nasdaq rose 1.6%. Both indexes set new record highs with the S&P reaching 6,284.65 on Thursday afternoon. The jobs report out Thursday spurred the S&P higher. The index gapped up at the open, closing Thursday up 0.83% (see chart below). The S&P 500 is up 26% from the selloff low on April 8, while the Nasdaq has surged 34.9%.

The Fear Gauge has Fallen

By Christopher Norwood • June 30, 2025
Executive Summary The S&P 500 rose 3.4% last week, climbing to 6,173.07 The Magnificent 7 are outperforming the S&P 493 by over 18% since April The Cboe Volatility Index (VIX) fell as low as 16.11 last week Investors seem unconcerned about tariffs and war Treasury interest rates are starting to fall The Fed has little reason to cut if unemployment isn't moving higher The stock market is at record highs Corporate bond spreads are tight, meaning credit is abundant The dollar has fallen by around 10% in 2025 Inflation is expected to move higher because of tariff The Stock Market The S&P 500 rose 3.4% last week. The Israeli-Iranian ceasefire was credited with the surge to the upside. The index had lost 0.7% over the prior two weeks.