Many CEO’s Now Actively Preparing for a Recession
How much should investors care about the fact that so many CEOs are preparing their companies for a recession? This really should not be that important to long-term investors.
One of the big things that market observers pay quite a bit of attention to is the comments that corporate leaders share with the public. This, in combination with the earnings results that their companies post and their projections of future earnings shape the opinion of analysts, and in turn, many investors.
There are countless articles generated in the media about where the economy or stocks may be headed, giving us all sorts of opinions about the prospects of where we are headed next. There is always speculation involved, whether it’s by company executives, stock analysts, the Fed, investors, economists, or whomever wishes to chime in on these things.
Not even the Fed, who spend a lot of resources poring over all the statistics we have on the economy, aren’t able to act with any real certainty, as predicting the future always does involve predicting, as opposed to knowing what will happen without any doubt.
We just don’t know exactly what will happen with the economy, the stock market, or companies, and therefore do have to guess at least a bit. That’s what speculating is, taking what we know and applying it to what may happen and make our best guess about it. If we are looking at the right things and guessing well, we may come up with predictions that are more probable, but this is a task that has several answers, and we can therefore see different ones from different people.
We do know that the economy is slowing, and that’s not being disputed by anyone, but stocks are moving ahead regardless. While people will make all sorts of predictions about both the economy and the market, we seldom see the relationship between them fleshed out that well, and ultimately investors need to know how these predictions will affect them.
The Market’s Opinion is The Only One That Matters
From this perspective, it always comes down to what something may do to the market, because that’s what investors care about. Market effects trump everything, and unless we realize this, and take account of how all this information we are presented with about the economy and companies will matter to the stock market, we’re not going to be very well advised and won’t be left with much of a clear idea of how to digest and act upon all this information.
The economic slowdown we’re in is one of these things, and we first need to understand that while economics and stock prices are correlated somewhat, this is not a direct correlation, and stock prices depend on this and other factors as well.
Ultimately, we need to look at the magnitude of an outflow of money that we may expect from a given economic scenario, such a seeing growth decline further, even get to the point where we go into a recession for a time. It’s not just a matter of us seeing a recession, there’s also the potential degree and duration of it to account for, instead of just throwing around the word recession and representing it as a real monster to be reckoned with.
We know that although people tend to invest their money into the long side of stocks as a matter of strategy, people will also distribute it to other assets more when they fear a bear market, and they will also tend to do more of this when economic forecasts deteriorate. This is to try to hedge their positions to dilute whatever losses in their stock positions may come as these downturns play out.
For those who are trying to manage risk, this is wise, but only so when the time is right. People are starting to ask that question more now, and this at least tends to slow down markets when we go from just asking to actually doing.
This is the key thing to remember though, that it’s not the conditions that drive these downturns in stock markets, and it never is. Rather, it is the market response to things that matter here from a macro perspective, which is the one we take when we look at stock markets as a whole and not just individual stocks or sectors, and these effects can vary.
CEOs Play a Different Game Than Investors Do
Hearing things like corporate leaders actively preparing for a recession may seem on the face of it very ominous, to the point where we may not want to wait to prepare for this as well and move money out of stocks. We need to remember though that corporate leaders do not have the same luxury that we have to wait, and require lead time, needing to act well in advance of something like this.
This is desirable if you are right, from a corporate perspective but increases the risk that you will act wrongly. Investors don’t really benefit from acting ahead of the curve like this though, but they certainly do have to take the risk side of this, and endure the pain and regret of getting out of positions too soon when that happens.
It’s not that we should not be on alert when we see companies preparing for darker times, or the Fed coming up with forecasts of economic growth that are trending lower all the time. Alert is the right word here though, and we can also prepare, but preparing for us should mean not acting yet, but getting ready to act if the situation ends up warranting it.
With business leaders already cutting costs to try to become leaner and meaner, which some describe as acting as if the recession is already here, this should not necessarily be viewed as indicating any real call to action among investors, at least yet.
Looking at the actual numbers that we’re facing, the Fed has revised its forecast for the next quarter from 2.4% down to 1.5% now. This might even be seen as a positive thing, taking us further away from the threat of an interest rate hike, and perhaps even seeing them drop rates again.
These are the things that investors should really be looking at, and not so much by what preparations corporate leaders are taking with their companies. They may be right about this, or they may not, but ultimately, it’s what the Fed thinks and does that matters the most.
We need to remember that we do live in a managed economy, although sometimes the Fed can only do so much, when they empty their bag of tricks and more magic is needed. The Fed does have quite a bit left in the bag though, and it’s only when we see them go all-hands-on deck and we’re still in trouble that we’re in actual trouble.
It is too early to say with any real certainty that we’re headed for a recession, even not accounting for any Fed bailouts. 1.5% may be seen as a pretty nice number by the market actually, and in this case, it is seen that way, because we really haven’t gone down yet.
If the market likes the 2.4% we were looking at a few weeks ago, and also likes 1.5%, they may not be too bothered by even the 0.4% that the Atlanta Fed is throwing around now, although that’s not the consensus.
The real reason is that as long as we get more money into the stock market than comes out of it, prices will go up, no matter what anyone says. Maybe most CEOs believe that we’ll get a recession by 2020. What sort of recession that is being predicted is another matter, and although recession can be a word that scares some people, some are a lot scarier than others.
A lot of the money that goes into the stock market just doesn’t care that much about medium sized pullbacks of the modest recessions that may cause this. Some of it does, and that money will move away during these times. We at least should want to see the color of their money first, and then decide what sort of investor we are, the kind that gets taken off of their position by fairly short-term outlooks, or those who are prepared to ride out these things as long as the hill isn’t either too steep or too long.
The bottom line here is that most investors really should not concern themselves with anything that has gone on yet or where we seem to be headed over the next quarter or year, as none of this stuff suggests a hill of the size that long-term investors should flee from.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
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