The “Less Bad” Economy


John Micklitsch, CFA CAIA, President & Chief Investment Officer

Everybody wants to know what the next move in the markets will be. The belief is that if you solve that riddle, untold fortune awaits. Ironically, if you simply shift your horizon to a long-term outlook, good fortune still awaits and with a much higher degree of certainty than trying to predict short-term market moves. To paraphrase the famous equity investor Peter Lynch, we have no idea which direction the next 10% move in the market will be, but we know what direction the next 100% move will be. 

That being said, one of the drivers of short-term market moves is actual results versus expectations. In bullish market environments, outlooks for corporate and economic results skew to the upside, leading to higher valuations built on elevated expectations. When actual results fail to meet the lofty expectations, stocks can be punished. On the other hand, in bearish environments where expectations are low and actual results exceed those low expectations, markets can rally for a period of time. If this all sounds as clear as mud and a crazy way to think about investing, you’re not wrong, because with short-term market moves you are trying to handicap two variables; actual results and the expectations for those results, which becomes measurably more difficult than a single variable analysis. 

This all brings us to the current market environment. There is no shortage of items on today’s “wall of worry”. Risk of a recession, geopolitical tensions, U.S. dollar status, inflation, bank stress, interest rates and a pending debt ceiling showdown, just to name a few. Concerns over those items probably explain 2022’s poor performance more so than they do 2023 thus far, because markets are forward-looking and, on that front, 2023’s economic conditions have been less bad than perhaps feared. When sentiment and expectations get so low that actual results are “not as bad” as expected, markets can rally in the short-term. A case in point is the reported first quarter earnings of the S&P 500 companies. Thus far, reported earnings are down roughly 1% year-over-year. But, if expectations were for them to be down 3-4%, that “less bad” outcome can be enough to give the market a short-term boost as traders (not to be confused with investors) race to get in front of the next potential trend. However, a “less bad” market or economy has its limits.  

Long-term, which is where the real money is made, markets require a healthy and growing economy fueled by innovation, demographic growth and productivity gains. On the productivity front, artificial intelligence has the potential to be a driver of economic growth, but it is still early days. A recent study showed that call center workers were 10-35% more productive when assisted by AI tools in their jobs. The ability to get twelve hours of productivity out of a ten-hour day would be huge for the economy. Just as semi-conductors, personal computers, software, the Internet, mobile phones and the Cloud have made our economy more productive, so too might the age of artificial intelligence. We will be exploring this topic further, incidentally, in a webinar on May 31st. Click here to register, we hope you can join us. 

In closing, we believe it is important to understand both the near term and long-term forces that move markets. We think we are currently in a “less bad” economic/market environment, where worst-case scenarios around a hard economic landing have yet to materialize. Markets can be supported for a while by “less bad” conditions, but long-term we will need to see signs of a healthy and growing economic cycle with robust consumer activity and capital investment to usher in a true, new bull market. The good news for investors is that you don’t have to try to time these cycles to be successful over time. To the contrary, finding an asset allocation that works for you and adapts to your needs, populating that asset allocation with high quality assets/strategies and then exercising patience, good judgement and discipline over multiple cycles, remains the best formula, in our view, to good fortune and the achievement of your long-term financial goals and objectives.  

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