Understanding where we are, and where we may be going.

Where We Are

In our last blog post, we briefly touched on how we can gather valuable context about the economy, the market, and specific investments by tracking key metrics. Today, we’re going to dive a little deeper into three of the key metrics we monitor to help anchor our understanding of the current economy.

1. Consumer Sentiment

Consumer sentiment is a real-time barometer of feeling, and it reveals the early signs of an improving or deteriorating economy. When people’s jobs are secure and their prospects feel bright, they feel more confident and optimistic, and make economic choices that contribute to growth. When they start to feel scared or uncertain, they sit tight.

Today’s metrics show falling consumer sentiment. Despite this, Americans have continued to spend, the labor market has remained strong, and unemployment is close to a half-century low. What does this mean? It depends on how consumers react. What we’re likely to see first is not necessarily a cut-back in spending, but a shift in how consumers spend - with more dollars going towards necessities.

2. Inflation

We are currently in a period where external shocks are contributing to inflation: Supply chain backlogs. The war in Ukraine. Rising prices on everything from shipping, gasoline and natural gas, food, and vehicles, to housing and airfare. These continued inflationary pressures make predictions about Fed policy and interest rates much less certain. Which leads us to the third key metric.

3. Yield Curve

The yield curve is a snapshot of interest rates across time periods, usually shown in U.S. Treasury yields. In a world of uncertainty, the yield curve can be an important economic indicator and the most accurate predictor of future slowing economic activity.

Here’s what it can tell us:

  • A steepening curve typically signals expectations for stronger economic activity.
  • A flattening curve often indicates a transitional period.
  • An inverted yield curve is common before a slow-down in economic activity.

So, what is the yield curve telling us today? This measure is now very close to inverting, which if maintained for 3 months or more has been a reliable warning sign that a recession is on the horizon within the next 6 to 36 months. While rate increases by the Federal Reserve can be a weapon against inflation, they can also slow economic growth by raising borrowing costs for everything for consumers and businesses.

Where We May Be Going

While where we are today is influenced by both market cycles and external shocks, where we are going is always based on the relationship between future risk and current security prices. Understanding this relationship is a key component of successful long-term investing.

The good news? Our clients know we continually track this relationship and use it to fine-tune our portfolios, picking stocks individually, company by company, based on values and their ability to endure economic uncertainty and volatility. Given this year’s stock and bond market declines, we are seeing more opportunities to make long-term investments than we have in a while and expect this to continue.

This is one way we help manage risk in good times and bad. And how we turn capital into confidence, and short-term volatility into long-term opportunity.

If you have any questions or concerns, please reach out to us. We welcome the opportunity to continue the conversation.

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