By John Lau
June 3, 2024 – From my vantage point, the biggest concern for this market right now is an unexpected economic slowdown because that is one of the few events that can potentially cause a material correction in stocks. While economic data suggest slower growth—for example, the Q1 GDP revision implied slower growth—the details of the GDP report were still solid. Additionally, weekly jobless claims appear to be entering an uptrend (the first in years, perhaps) but they’re still extremely low in an absolute sense.
The concerns about that slowdown are disappointing earnings and corporate commentary.
While Q1 earnings were “fine,” they were mostly fine because U.S. companies are adept at controlling costs and maintaining margins, not because of solid aggregate demand, especially over the past few weeks. We have seen numerous companies from multiple industries post disappointing results based on a combination of underwhelming gross sales and the inability to maintain margins. Put plainly, the number of companies citing reduced demand or more cost-conscious customers are growing quickly and spreading across industries. This behavior is being called “retrenching” in the financial media and is another signal that the economy is experiencing slowing growth. Examples of companies reporting this type of behavior include (but are not limited to): Workday, Inc (WDAY), Salesforce (CRM), American Airlines (AAL), Kohl’s (KSS), Walgreens (WBA), Lululemon (LULU), Humana (HUM) and others.
Some segments of the market may cheer a slowdown and assume that would accelerate the Fed’s schedule to cut interest rates. But historically, the Fed has not been able to cut rates at the right time to prevent the slowdown from becoming a broader economic contraction. That doesn’t mean they can’t do it this time, but catching a falling knife doesn’t work in real life; it doesn’t work in stock trading, nor do I think it works in monetary policy. So, while I hope it does, I do want to push back on this “bad is good” idea.
Looking forward, bad data may continue to look good for the market a while longer; I’m not one to argue against price action. This doesn’t mean the S&P 500 cannot run to 5,700 or higher if we see a sharp drop in yields and when investors roll their earnings estimates at 2025 (which are currently at $270/share[1]). But I want to distinctly and clearly point out that the evidence of slowing growth on both the macroeconomic and microeconomic fronts is increasing my medium-term fear that investors may be complacent to economic slowdown risks. If an economic slowdown does appear on the horizon, I think the second half of the year could be much more volatile than the first half. My team and I will be closely watching macroeconomic data and microeconomic results to tell us if (or when) the slowdown appears imminent, because at that point it will be time to get defensive. For now, bad is still good so it makes no sense to materially de-risk, but we will continue to gradually move to reduce volatility in portfolios while still maintaining long exposure so that if we are wrong, our investments rise with the tide—and if we are right, we will be insulated from the coming volatility.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
[1] FactSet
Growing Economic Concerns
By John Lau
June 3, 2024 – From my vantage point, the biggest concern for this market right now is an unexpected economic slowdown because that is one of the few events that can potentially cause a material correction in stocks. While economic data suggest slower growth—for example, the Q1 GDP revision implied slower growth—the details of the GDP report were still solid. Additionally, weekly jobless claims appear to be entering an uptrend (the first in years, perhaps) but they’re still extremely low in an absolute sense.
The concerns about that slowdown are disappointing earnings and corporate commentary.
While Q1 earnings were “fine,” they were mostly fine because U.S. companies are adept at controlling costs and maintaining margins, not because of solid aggregate demand, especially over the past few weeks. We have seen numerous companies from multiple industries post disappointing results based on a combination of underwhelming gross sales and the inability to maintain margins. Put plainly, the number of companies citing reduced demand or more cost-conscious customers are growing quickly and spreading across industries. This behavior is being called “retrenching” in the financial media and is another signal that the economy is experiencing slowing growth. Examples of companies reporting this type of behavior include (but are not limited to): Workday, Inc (WDAY), Salesforce (CRM), American Airlines (AAL), Kohl’s (KSS), Walgreens (WBA), Lululemon (LULU), Humana (HUM) and others.
Some segments of the market may cheer a slowdown and assume that would accelerate the Fed’s schedule to cut interest rates. But historically, the Fed has not been able to cut rates at the right time to prevent the slowdown from becoming a broader economic contraction. That doesn’t mean they can’t do it this time, but catching a falling knife doesn’t work in real life; it doesn’t work in stock trading, nor do I think it works in monetary policy. So, while I hope it does, I do want to push back on this “bad is good” idea.
Looking forward, bad data may continue to look good for the market a while longer; I’m not one to argue against price action. This doesn’t mean the S&P 500 cannot run to 5,700 or higher if we see a sharp drop in yields and when investors roll their earnings estimates at 2025 (which are currently at $270/share[1]). But I want to distinctly and clearly point out that the evidence of slowing growth on both the macroeconomic and microeconomic fronts is increasing my medium-term fear that investors may be complacent to economic slowdown risks. If an economic slowdown does appear on the horizon, I think the second half of the year could be much more volatile than the first half. My team and I will be closely watching macroeconomic data and microeconomic results to tell us if (or when) the slowdown appears imminent, because at that point it will be time to get defensive. For now, bad is still good so it makes no sense to materially de-risk, but we will continue to gradually move to reduce volatility in portfolios while still maintaining long exposure so that if we are wrong, our investments rise with the tide—and if we are right, we will be insulated from the coming volatility.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
[1] FactSet
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