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My favorite piece of economic data was released last Thursday, which is put out by the Conference Board, called the Leading Economic Index or LEI. This is released monthly and it’s a combination of 10 economic data points, that are weighted to produce the index. For the month of March this index increased by 0.3%, following up from a 0.6% increase in February.
Why is this important? Well, it’s been a great predictor of recessions. There are several other indicators that have proved to be a reasonable predictor however the LEI has given you a 6–9-month warning before it happens.
This latest result tells us that the economy overall is still growing at a nice rate, and any potential future recession is likely long in the future. The big move in capital markets is definitely the bond market. The U.S. 10-year treasury went from around 1.5% at the start of the year to 2.93% at the time of writing and is looking to climb higher.
This historically is a huge move so quickly and has a few consequences:
- Investing in bonds (usually considered the safer play, has been a big loser. We measure the overall U.S. bond market by the Barclays U.S. Aggregate Index, and at the time of writing was down just under 9% year to date. Compare that to the S&P 500 which has rallied off the lows and is down 5.73%. This scenario is foreign to most, however when bonds were so low for so long, it was inevitable.
2. As rates rise, investing in bonds will become more attractive, when you compare them to stocks. We in the investing world talk about the Equity Risk Premium. This is classified as the excess return earned by an investor when they invest in the stock market over the “risk free” rate. The old “more risk, more reward” argument. The risk-free rate is calculated by subtracting the current inflation rate from the yield of a U.S. Government bond over your investment duration. That’s as deep as I’ll get, however let’s just say that the equity risk premium is coming down as rates rise. Below is a graph showing the equity risk premium on a 3-year investment, you’ll see that we have moved into that 1.5-2 area. Staying within that range you see a drastic decline in average equity returns in the next 3 years and an increase in the range of the spread in returns.
3. I won’t go deep on the negative effects that higher borrowing costs can have on an economy, I’m sure you can figure that one out on your own, other than to say at some point the economy will slow down.
Summing this up for you, recessions are part of a normal economy. Nothing can continue to go up forever. The LEI index gives me hope that this economy is strong, still growing nicely and as long as the Fed does not do too much to quick, we should be able to maintain a healthy growth rate, not what we have just seen following the massive amount of money that has been pumped into the economy. All that with the backdrop that equity returns will not be like they have been in the last 3 years, so now more than ever is the time to be educated on the investing process. This is the reason I write to you each week.
With that, here’s the buy sell. Updating 2023 numbers next week.
HWFFS
Health
Here is a book recommendation this week. I’ve been listening to a podcast by Ed Mylett. He was an early founder in an insurance group called WFG, which has now become a Transamerica company. He’s a high energy, success driven guy and has some great guests on his show, that touch on all topics HWFFS related. He has a book coming out called The Power of One More. If you see a picture of him, you’ll know why it’s labelled that, because he is a big guy who has certainly spent a lot of time in the gym. His thought process of one more rep in the gym has come across to the business world and is a pretty cool story. He is deep into longevity and what’s good for the body, so there’s sure to be a great amount of knowledge to be learned.
Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one’s entire investment.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
