The Resonant Review: Will the Market See its Shadow?
March 3rd, 2023
Around this time of year, members of our team enjoy making reference to the cult-classic film, Groundhog Day, in which Phil Conners, portrayed by Bill Murray, is a contemptuous weatherman forced to relive the same day over and over. This year is no different. In fact, looking deeper at the popular tradition itself we find some common ground. Specifically, as it pertains to predictions.
“You want a prediction on the weather, you’re asking the wrong Phil. I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey and it’s gonna last you for the rest of your life.” Phil Conners on weather predictions, Groundhog Day
Now, we can relate with Phil Conners a bit as he isn’t wrong in that there are many ‘experts’ that prognosticate on things—be it the weather or the markets. And we share his view that forecasts are rarely helpful. However, as referenced in our most recent quarterly letter, we continually assess the relative value of asset prices against the current macroeconomic backdrop. And while we are not as pessimistic as Phil Conners, we are certainly cautious given that economic fundamentals are still unfavorable.
After rising interest rates, persistent inflation, and geopolitical turmoil led to a painful 2022, the global markets are off to a solid start in 2023. What has triggered this reversal? Well, for one, consumer sentiment improved on the heels of moderating inflation. The downtrend in inflation provided optimism for a less hawkish Fed and fueled hopes for a Fed pivot. The upbeat mood was also supported by China coming out of its Covid-19 lockdown which could unleash years of pent-up consumer spending. Finally, it’s worth noting that investors are emotional creatures, so it’s not strange to believe that the year-to-date rally has been helped by a little “Fear of Missing Out."
Even as we write this piece, we’re hearing more chatter equating the current rally to a bull trap versus a beginning to a secular bull market. We tend to agree. For instance, inflation remains elevated, the Purchasing Manager Indices (PMIs) remain in contraction territory, the yield curve is inverted, and the Leading Economic Index (LEI) has declined for 10-straight months. Add to that weak corporate earnings and elevated valuations create an ominous recipe for investment conditions.
It also feels a bit like déjà vu in that today’s market draws some parallels to that of the dot-com era (chart below). Specifically, a market with a prolonged down trend often experiences moves higher. This may be what we are experiencing today and is a reminder that while history may not repeat itself, it often rhymes. We believe it will take time for the market and economic fundamentals to correct themselves.
Amid a hawkish Fed, elevated valuations, and an uncertain economic backdrop, we continue to position our portfolios more defensively. Within public equities that means not chasing growth-oriented and high-beta investments. For our fixed income investments, that means targeting short-duration and high-quality bonds. Additionally, as a balance to stock market volatility, we have been directing our attention to the short-end of the yield curve where bonds are yielding between 4% and 5%.
Finally, to bring the Groundhog Day theme to a close, we’d be remiss if we didn’t point out that Punxsutawney Phil was supposed to be a badger! The weather lore was popularized in German-speaking areas where the badger was the forecasting animal of choice. Being Wisconsinites ourselves, it might be time to make the switch back. In fact, Punxsutawney Phil’s weather accuracy rate is only 39%, so it’s reasonable to believe that Bucky Badger would do a much better job.
Resonant Capital Advisors, LLC (“Resonant”) is an SEC registered investment adviser located in Madison, Wisconsin. This communication is limited to the dissemination of general information and, accordingly, should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from Resonant.
This communication contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”) which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. As such, there is no guarantee that the views and opinions expressed in this communication will come to pass. Investing involves risk, including risk of loss.
This communication may also discuss and display charts, graphs, and formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions.
Although all information provided in this communication is gathered from sources deemed to be reliable, we cannot guarantee the completeness or accuracy of such information. The information should not be regarded as a complete analysis of any subject discussed. All opinions included constitute the authors’ judgment as of the date of this communication and are subject to change without notice.
For additional information about Resonant, please request our disclosure brochure as set forth on Form ADV or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully.