economics

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11 Mar 2025

Market Turbulence and Recession Fears: What You Need to Know

By glen

As stock indexes plummet from record highs, many investors are left wondering what’s next.  US stock indexes have been dropping over the last several weeks, causing investors much pain and consternation.  Suddenly, a possible recession is making headlines too.  Are these related?

Stock Market Decline

The stock market became way overpriced last year.  You can look at how “cheap” or “expensive” stocks are by considering what companies have earned or expect to earn.  This is commonly measured by comparing stock price to profit, which answers the question:  how much profit am I buying for each dollar of stock price?  Looking at the popular S&P 500 at the beginning of February, $22 bought you $1 of earnings.  The ten year average is $18 for $1 of earnings.  Through this lens, stocks were very expensive.

The stock market can gyrate between cheap and expensive regardless of what the overall economy might look like.  It’s normal for stock prices to “correct” after becoming too expensive, and that can happen even when the underlying economy is healthy.

The last several weeks have brought an unfortunate run of bad economic news.  At the beginning of February, the only thing holding up stock prices were “thoughts and prayers” because $22 is simply too much to pay for $1 of profit.  On February 28th a giant crack showed up in the economy, and suddenly the temperature had dropped, the wind picked up, and storm clouds were forming.

Economic Concerns Emerge

How much the US economy grows is measured by this thing called the Gross Domestic Product or GDP.  This measure has nothing to do with stock prices and looks at how much the US economy makes: factories, restaurants, construction, real estate, defense spending, the whole shebang.  The Atlanta Federal Reserve publishes a popular, and typically accurate, model of what the GDP number for the current quarter might be, since we don’t know the actual number until the quarter has long ended.

On February 28th the Atlanta Fed’s GDPNow model unexpectedly swung from a very healthy 2.5% to a negative number.  The fact that it fell off a cliff overnight was staggering and unusual.  The model is currently predicting first quarter GDP will be -2.4%.  This is one of the primary reasons we’re suddenly discussing a recession.

A recession is usually considered two consecutive quarters (six months) of a negative GDP number.  According to the GDPNow model we may already be at the beginning of a recession, and before February 28th this wasn’t on anyone’s radar.  Sometimes the model can be off, some data may not be accurate, there can be noise; however, as new data has been coming in, the model has stayed negative.

This creates a bigger problem for the stock market.  We discussed the value of stocks in terms of what companies are expected to earn.  With the economy suddenly shrinking unexpectedly it’s harder to know what companies might earn this year, which means it’s hard to know if stocks are cheap or expensive.  It will take some time for things to settle down and profit estimates to reflect changes in the economy.

What happened?  Let’s look at some other economic signs.  Inflation was almost back to normal; however, in January some readings stopped dropping and began to tick upward, and some measures of job growth began to slow unexpectedly.

The overall health of the US economy is rooted in inflation and employment staying in healthy territory, both of these appearing to slip at the same time is not a good sign, and the model quickly picked up on these changes.  That was all the stock market needed to “correct” or return prices to a more historically reasonable level.

Policy Uncertainty

While stocks were overpriced, the problems with the economy are rooted in tariffs, threatened and real, introduced by the new administration in Washington, D.C.  It’s important to note that businesses and financial markets (and many humans) hate uncertainty, and tariffs, threatened or real, created a tremendous amount of uncertainty.

It would have been foolish for businesses not to respond to real threats, and these responses caused a chain reaction as US and global companies positioned themselves for a tariff war.

If you owned shares in XYZ Corporation, and XYZ saw the tariffs coming to eat their business model, and management, knowing this, did nothing, you would call for management to be fired.  It’s not hard to see how this spreads.

In today’s world, tariffs are only useful in very specific situations, for example, when a country needs to protect a niche industry. It makes no sense to use tariffs on a large scale when you’re already the biggest and most powerful economy on the planet.

The other issue facing the economy are the large scale terminations of Federal workers.  It appears that little thought has gone into these initiatives, and we’re already seeing unintended consequences as civil servants are terminated.  These efforts will increase unemployment and create further drag as vendors and companies that supported these workers are impacted.  Consider the simple example of a “mom & pop” lunch counter near a shuttered office: now “mom & pop” are out of a job, their employees are out of a job, and they are no longer purchasing the goods and services used to keep their lunch counter going.

What This Means for Investors

The only silver lining for investors at the moment are bonds.  Bond prices have risen as investors seek safety, and bond holdings in portfolios have enjoyed a small boost.  If the Federal Reserve is forced to cut interest rates in the coming months, it will give bond prices another small boost.  In the meantime, investors can enjoy the continuation of elevated yields, which are the result of post pandemic inflation control measures.

It’s still possible for the US to avoid a recession.  The economy could find some lift, leaders could proactively take steps to stop making harmful policy changes, or some combination of factors, but at this point the damage has been done to people who own stocks, and that damage could worsen before we turn the corner.

If your portfolio has taken a beating, you are in good company; however, if you were unclear about how your portfolio is constructed, how it aligns with your goals, or if the answers you’re getting from your financial advisor don’t align with reality, this is a great opportunity to do some housekeeping and realign for the long run.

We’re here to help.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

25 Aug 2022

ESG Investing: It’s Not Easy to Invest with Heart

By glen

 

Environmental, Social, and Governance Investing, or ESG is a hot topic right now.  You may have seen ESG options in your employer’s retirement plan, or advertisements for this “style” of fund or index.

 

What the Heck is ESG?

ESG is a Wall Street trend that gets beyond just financials by looking at how corporations address broader societal goals.  It asks: how is this company functioning as a citizen?  This thinking evolved from the idea of corporate social responsibility.

The idea: a corporation has responsibilities beyond answering to shareholders, and shareholders should want to invest in companies that are good citizens because focusing on all stakeholders is good for society, and good for a sustainable bottom line that looks beyond just the next quarter.

This idea has been boiled down to three big categories: environmental concerns, social concerns, and governance concerns.  Let’s take a quick look at each of these:

Environmental Concerns

These include the topics of climate change and environmental sustainability.  It looks at the impact a company has on global warming and natural resources.  The thinking: current environmental trends are unsustainable.

Social Concerns

These include: diversity, human rights, consumer protection, and animal welfare.  If you’re thinking it sounds like this could get political, you’re right, and it’s more tedious than it sounds.

Corporate Governance Concerns

Topics are wrapped around management structure, employee relations, and compensation.  The question this gets to: how is the company managed, how does it treat employees, and how is everyone hired by shareholders paid?

What Does ESG Investing Look Like?

Without getting into the weeds, you can see how these topics may be important to an investor.  We have a classic situation, an investor need has been identified, and Wall Street has cooked up a solution for you!  Is this out of the kindness of their hearts, or out of grave concern for these topics?  Of course not, it’s to get paid.

Wall Street has been in the process of building ESG indexes, ESG funds, and ESG ratings.  Here is a simple example.  They will take something like the S&P 500, the 500 largest stocks in the US, an important bellwether, remove stocks based on “ESG factors”, and then sell you an ESG fund that costs more than an S&P 500 fund.  Now, the thinking goes, you are a responsible investor, and now you can sleep better at night knowing your investments are making the world a better place.

Of course, it’s too good to be true.  Let’s look at why.

The Problems With ESG

In May Tesla was removed from a popular ESG index because of issues with “rampant racism,” and crashes associated with autopilot technology.  Racism is never justified, and faulty safety technology that kills people is never a good thing; however, it’s hard to debate that Tesla has been significantly moving the needle on auto carbon emissions with it’s own vehicles, and by forcing competitors to quickly come up with electric vehicle offerings.

If you take this one example, and imagine how environmental, societal, and corporate governance issues may intersect through a single lens that tries to boil a very complex ocean, the entire proposition becomes dicey, especially for an investor whose primary goal is to earn a good return, which is all of us.

From a recent Harvard Business Review article: “It’s long past time we faced a hard truth: despite a historic surge in popularity, ESG investing will not tackle our generation’s urgent environmental and social challenges…Yet it’s hard to blame casual observers for believing that investing in an ESG investment fund is helping to save the planet.”

From The Economist: “although ESG is often well-meaning it is deeply flawed.  It risks setting conflicting goals for firms, fleecing savers and distracting from the vital task of tackling climate change.  It is an unholy mess that needs to be ruthlessly streamlined.”

These examples go on, and of course in the current political climate ESG is painted as a vast left wing conspiracy.  There have been a slew of op eds in the Wall Street Journal to this point.

Another related issue that is seldom discussed, bonds.  Most of the ESG discussion focuses on the stock holder perspective; however, a diversified investor owns bond funds as well.  A bond holder is still providing capital to corporations.  There are far fewer ESG bond funds, and this type of analysis in the world of bonds is even more complex.

In a time of low yields, bond investors have less flexibility given the performance required from the bond side of a portfolio.

Considerations for a Concerned Investor

The important point here is to not simply invest blindly in an ESG fund, and believe you are somehow achieving a personal goal related to what’s important to you under this broad ESG umbrella.

The ESG funds are twisted and contorted when it comes to the goals they are trying to achieve; therefore, any single goal that is important to you may or may not actually be achieved.  To make matters worse, your returns may suffer compared to conventional funds, and those differences add up over time.  Don’t forget, you’re also paying higher fees for this privilege.

 

The Economist, a very old and conservative British newspaper, had one conclusion: “ESG should be boiled down to one simple measure: emissions.”

If this topic is important to you, there are funds available that only address climate change, and this kind of laser focus can be successfully achieved for certain parts of a portfolio, namely indexes of large US companies.  Attempting to bring this focus to other areas such as small company stocks, international investments, and bonds quickly becomes a more complex proposition.

The bottom line is that your long term wealth is too important to risk the gamesmanship and conflicting interests in the current world of ESG funds.

Please reach out if you would like to discuss ESG funds, or funds that may tackle specific issues that are important to you.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities.