What slowing growth means for investors
Bob Landaas: Kyle, a number of years ago, a study came out and showed that weather forecasting past 24 hours is no more accurate than random guessing. And the issue is it’s very complicated to forecast weather beyond 24 hours because of how many variables are involved.
And I think the analogy is spot-on with forecasting recessions—just how difficult it really is. There are just so many variables: 41 developed countries in the world; they all have different rates of growth. And it’s very difficult, if not impossible, for most economists to predict recessions with any degree of accuracy.
What we are able to do is talk about trend line. GDP was at 2.9% last year, maybe 2% this year, maybe 1.25% to 1.5% next year. So, we can talk about declines. But we’ve got this backdrop of slowing global growth. We have issues with trade. We have issues with earnings.
What’s your take on the eventual recession, slower rates of growth in the markets?
Kyle Tetting: You know, Bob, I think it’s so important for clients, for investors, to remember that just because growth is slowing, it doesn’t mean you can project out what the endpoint for that is, and it gets back to your point about how difficult it is to predict even a couple of months out, let alone a year or two years out into the future that a recession is coming.
And so, I think you look at that slower rate of growth. Maybe you adjust investments a little bit accordingly for that, but it doesn’t mean that the end is necessarily coming or even that the end is here. It simply means that growth has slowed.
Bob: You have a bond market telling us that things are slowing. You’ve got the 10-year Treasury at 2.08%. It hasn’t been that low in a long time. You’ve got the stock market, on the other hand, telling us that everything looks pretty good, with the Dow now up quite a bit above 26,000.
Kyle: Yes. With the exception of the month of May, it’s really been a great year for stocks. So, if all you did was look at the stock piece of your portfolio, the stock piece of your investments, and say, well, what’s that telling us about the state of the economy? What’s that telling us about markets more broadly? You’d look at that, and go, yes, everything is great.
But I think it’s the bond piece really that’s signaling perhaps there’s a little bit more to be concerned about here. We’ve seen, as you mentioned, rates come down pretty significantly, especially on that 10-year Treasury. But also, as you look at spreads, we’ve seen spreads widen, meaning that investors are demanding a little bit more now to take risks with their bonds. Maybe not to the level that we’d expect, given some of the concern, but certainly far more spread today than there was even six months ago.
Bob: The long-held belief was that if the bond market was rallying and the stock market was rallying, one of them has got to be wrong. And Kyle, I wonder if it’s really different this time around, with a lot of foreign money pouring into U.S. Treasurys at a time when interest rates are negative in much of Europe. With inflation so low, I think we have maybe a false read on the bond market.
I think they’re both accurate at this point, where stocks are truly reflecting reacceleration of earnings that are supposed to happen late this year. The bond market, on the other hand, was correctly forecasting low inflation way into the future. And the fact that central banks are still struggling to get the mix right to stimulate their economies
Kyle: And perhaps, Bob, the U.S. is the cleanest shirt in the dirty laundry, that when you look at growth rates in the rest of the world, they tend to be far lower than what we’re seeing here in the U.S. right now. And so, while we talk about this slowing environment, slowing from 2.9% certainly gives you more cushion than it does from a low 1% that you’re seeing in much of Europe or the rest of the developed world.
And so, I think the cushion that we have here in the U.S., in terms of where growth is right now and the ability to get a little bit better rate here than you can get in much of the rest of the developed world is driving flows, is driving money into the U.S.
Bob: You gave a presentation yesterday to our research group about value stocks versus growth stocks, and as you’re well aware, growth stocks have done extremely well over the last handful of years at the expense of value stocks.
But it looks to me like that’s starting to shift a little bit as some of the big technology names run into interference with privacy concerns, antitrust and a slowdown in China, where they get a lot of their earnings.
Kyle: And of course, the challenge comes in when you’re looking just at the indexes, that if you talk about the Russell Growth Index versus the Russell Value Index, the concentration in some of those names that you’re talking about here—with antitrust concerns, with privacy issues—the concentration is very high in those names in the growth index.
On the other hand, in the value index, you have much more diversity. Add in the fact that value names tend to hold up far better in slowing environments, that value names tend to be the places that are on sale—again, just by the nature of that value.
And we could very well be entering an environment where the lead that growth stocks have enjoyed begins to shift.
Bob: And, as always, it’s never one side of the boat or the other. You still want growth stocks as well as value stocks in your portfolio.
Kyle: Absolutely. You’re right, and it’s not even just about growth versus value, but what other areas you can play. You can always hit the ball right down the middle and say let’s find something that’s doing a little bit of both. And that’s where things like active management really become key, because they have the ability to lean into those opportunities.
Bob: Thank you. Kyle.
Kyle: Thank you. Bob.
Bob Landaas is chairman and chief executive officer of Landaas & Company.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik
Fed’s about-face, interest rates, earnings, a Money Talk Video with Bob Landaas and Marc Amateis
How to handle fears of recession, a Money Talk Video with Bob Landaas and Kyle Tetting
Recessions: Uncertainty suggests balance, a Money Talk Video with Kyle Tetting
Ignore bonds at your own risk, a Money Talk Video with Kyle Tetting
Retaining value in your stock portfolio, a Money Talk Video with Marc Amateis
(initially posted June 26, 2019)
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