📰 Sunday Edition 42: Markets, Fed Rates, Unemployment, and Yield Curve

👋 Hey, Mike here! Welcome to ✨ Sunday Edition 42 ✨ Each week I dive into the markets, the economy, and investing.

Quote of the week

"Each of us tends to think we see things as they are, that we are objective. But this is not the case. We see the world, not as it is, but as we are—or, as we are conditioned to see it. When we open our mouths to describe what we see, we in effect describe ourselves, our perceptions, our paradigms."

(Stephen R. Covey, The 7 Habits of Highly Effective People)

Markets

Whew! Markets took a hit this week with the S&P 500 down 2.1% while the VIX is up 42.7%. The Nasdaq is still up 145% in the past 5 years:

It always looks dire until we zoom out a little and see that we are re-visiting levels we haven't seen since—May. Things may be a little more serious, however, as I'll explain later.

I think it's important to keep showing the long-term market trends when we are constantly bombarded with negativity and fear in the media. Remember: the goal is to think and see clearly, so our quality of decisions is as high as possible. This directly affects our long-term investing success.

Sectors

Information tech took a 4.9% hit while utilities gained 4.0%. Information tech still reigns supreme on a 5y basis of ~20% CAGR.

Let's dig a little deeper.

Monetary Policy

The Federal Reserve has maintained its target federal funds rate at 5.25-5.50%, citing solid economic expansion and moderating job gains. While inflation has eased over the past year, it remains above the 2% target. The Fed sees improving balance in economic risks but remains cautious, stating it won't reduce rates until more confident about sustainable progress toward the 2% inflation goal. The committee continues to monitor various economic indicators and stands ready to adjust policy if needed to support maximum employment and price stability.

These elevated funds are still pressuring the economy and the market (which we've seen this week). Let's look at unemployment:

Economy

Unemployment

The unemployment rate has increased from 4.1% to 4.3%. This is significant because:

1. Previously, the rate slowly increased between 3.8% and 4.0%, changing by only 0.1 percentage points at a time.
2. The current increase of 0.2 percentage points is larger than these previous increases.
3. This larger increase suggests that unemployment is not only rising but rising at a faster rate than before.
4. This acceleration in the unemployment rate is concerning, as it could indicate a weakening job market.

The combination of the rising unemployment rate and poor market performance this past week has me somewhat concerned. Let's see if the yield curve helps alleviate some of these worries:

Yield Curve

The yield curve has historically been an accurate predictor of upcoming recessions. However, it's generally not advisable to liquidate all assets when the yield curve inverts (dips below zero). The following graph depicts the last 40 years, with grey areas representing recessions. Note how each time the line drops below zero, a recession follows shortly after:

When we zoom in, we see that we are overdue for a recession:

Here's my personal outlook.

Economic Outlook

Here's the thing: nobody knows what tomorrow brings. It would be stupid of me sell everything, but it would also be stupid of me to buy a bunch of low-quality growth stocks. Since my portfolio is geared towards quality and stability, I'm going to ride the wave. The probability of a recession is higher, in my opinion, but nobody knows.

Internet Finds

I thought this was awesome:

The pyramid of success by John Wooden who is considered one of the greatest coaches of all time.

His teams won a remarkable 80% of the time that they took the floor over his 40-year coaching career, including 16 conference championships, an 88-game winning streak, and 10 NCAA men’s basketball championships at UCLA, 4 of which featured undefeated teams.

Kpaxs on X

(click to expand)

Portfolio

Performance took a hit this past week but overall CAGR remains intact:

Here's what I'm invested in right now: