Jerry Hendricks
Portfolio Manager
Revisiting our Recession Call
08/04/2023
Portfolio Adjustment Summary: Given the recent compilation of strong patch data within the economy and broadening strength of the equity market, we have removed our Recession Protection Theme from the Strategas Macro Thematic Opportunities ETF (SAMT). During our recent adjustments to the portfolio, we reduced the number of themes down to three, with the following equally weighted: Artificial Intelligence, Cash Flow Aristocrats, and De-Globalization. With rates providing an income alternative not witnessed for the better part of a decade, we find Staples and Utilities shunned in favor of money market instruments with higher yields. We therefore reduced our weights to those defensive types of investments while still maintaining an above-average weight in cash as we look to ensure a balanced approach with the risk-reward of entering new long positions limited currently, in our view.
Portfolio Adjustment Commentary: Within our recently published Market Outlook, we ran through our reasonings why we pulled back from our recession outlook, acknowledging the strong patch evident in the economy led by a strong labor market as well as a resilient housing market. We also conceded that the broadening out of the equity market could provide fodder for the trend to continue its upward trajectory. Below, we run through our reasoning behind why our recession call did not work. While we certainly have seen items come OFF our recession checklist recently, this along with our list below does not mean we believe we are entering a period of above-trend growth. Therefore, we would continue to proceed carefully when looking to deploy new money as the market appears overbought as our work shows valuations stretched and expectations high. (See Implied Valuation Worksheet below).
WHY THE RECESSION CALL DIDN’T WORK OUT
REASONS ECONOMIC GROWTH WAS BETTER THAN EXPECTED THUS FAR IN 2023
- Tight labor markets: Profit margins have declined for the S&P 500, but not enough to prompt companies to lay off workers. According to the Bureau of Labor Statistics Job Openings data (JOLTs), 9.8 million job openings remain in the United States.
- Savers’ income surged: Higher rates raise the cost of capital, but they also benefit savers. Using money market fund data, we estimate that monthly income from savings is running at more than $20 billion per month.
- The Fed offset Quantitative Tightening (QT) in March: In response to the collapse of Silicon Valley Bank in March, the Fed suspended its program of quantitative tightening (Q.T.). Assets on the Fed’s balance sheet jumped by roughly $400 billion in three weeks. The S&P 500 was up a mere 58 basis points year-to-date the Friday before SVB failed. The Index is up nearly 19% today. (As of July 28th)
- A reduction in the Treasury General Account: At the same time the Fed’s balance sheet was expanding, the Treasury Department drew down its General Account from $580 billion in January to roughly $20 billion by June 1st. This liquidity was injected directly into the financial system.
- A decline in the Strategic Petroleum Reserve (SPR): The Department of Energy continues to draw on the SPR, which now stands at its lowest level since 1983 at roughly 346 million barrels.
- Government spending: Although money for infrastructure, clean energy and CHIPs has not been spent, the US budget deficit increased $800bn in 2023. Just $100bn of that is due to interest cost. The rest is lower taxes & higher spending.
- The lags associated with monetary policy changes are long and variable.
Note: The above list contains data derived from the following sources: FactSet, Bloomberg, Bureau of Labor Statistics, Federal Reserve, Treasure Department, Department of Energy, Congressional Budget Office, and Strategas Securities as of July 28, 2023
Implied Valuation Worksheet
Source: FactSet and Strategas Securities as of July 28, 2023
Definitions: Earnings per share (EPS) = a company's net profit divided by the number of common shares it has outstanding; P/E = price-to-earnings ratio relates a company's share price to its earnings per share; TTM P/E = Trailing Twelve Months Price to Earnings Ratio; CPI = the Consumer Price Index which measures the overall change in consumer prices based on a representative basket of goods and services over time; CY = calendar year
Past performance is not indicative of future results. Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index.
This communication was prepared by Strategas Asset Management, LLC ("we" or "us" or “our”). This communication represents our views as of 8/01/2023, which are subject to change. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.
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