In light of a forthcoming economic slowdown, labor market, spending, earnings, and savings data tell an interesting – and even reassuring – story.
First, investors should remember that recessions are a normal phenomenon. They are a function of the capital markets and the business cycle. With the right mindset and tools, we can navigate them well.
To ease concerns regarding an anticipated economic slowdown, here are four things to know:
1. The slowing labor market is positive
Data shows that the labor market is slowing. Job openings are decreasing, and unemployment is ticking higher.
Rather than an alarming signal, this is the expected, intended consequence of the Federal Reserve’s action and is seen as a positive result.
As we shared in our View of 2024, “We believe [a cooling labor market] is an appropriate shift to sustain the intact disinflationary cycle of 2023.”
2. Companies and consumers are doing well, even as some spending slows
Companies have continued to grow their revenue and maintain margins, using AI and other sources of productivity to sustain high earnings. As such, we’ve seen double the anticipated earnings growth. Consumers are also doing well, surprising economists with their resilience.
Yet consumers are exhibiting some prudence. Goods spending has slowed, and there is a notable difference in discretionary versus nondiscretionary spending.
Compare the earnings of Walmart and Starbucks, for example. While Starbucks has seen the effects of less discretionary spending, Walmart has benefited from consumers spending more on staples.
Relative to other slowdowns, the consumer is strong, even as the labor market and spending ease.
3. Savings rates are low, but people still have a lot saved
Headlines accurately state that savings rates have dropped to almost 0. However, savings rates are only a function of today and have nothing to do with previous accumulation.
As such, we are still seeing excessively high savings amounts. Money market assets are 3 trillion dollars above pre-Covid levels.
That said, while current discretionary spending may be slowing on a relative basis, savings amounts across consumers remain high.
4. Fixed income can be a ballast, but equity market participation is foundational, even during a slowdown
We do not recommend trying to time a recession or jumping out of the market entirely.
Instead, risk management techniques, cash management options, and a level-headed approach are tools to navigate a slowdown well.
At Credent, we intentionally use fixed income as a ballast, but we know that equity market participation is essential to keep up with inflation and experience long-term growth. Ultimately, net of inflation, we believe bonds carry more risk than stocks over the long run.
Therefore, in the face of a slowdown, rather than trying to take control by opting out of the market, accept a controlled and appropriate equity market profile supported by careful fixed-income allocations.
To talk to an advisor about how you can navigate an economic slowdown, fill out the form below.