stocks bonds ETF straight out of downtown Chicago. This is Zach's Market Edge. Welcome to Zach's Market Edge, the podcast about investing in your life. I'm your host, Tracy Rinek.
And this week I'm joined by John Blank, Zach's Chief Equity Strategist and the PhD economist to talk about our favorite end of the year topic. We've done it many, many years now. Will there be a recession in 2023? That's the topic.
For all the years we've done it, John, we have not yet had a recession come in. No wait, I take that back. We must have during the pandemic. But none of us could have predicted that in our end of the year podcast for 2019.
That would have been, and it was super quick and we were out of it. But now here we are again. Everybody's predicting the recession for 2023. So what will we say?
Will we predict it too? I don't know. And we're gonna cover how do you invest for this if we think there is actually gonna be one in 2023. So welcome back, John.
Thanks, Tracy. So I'm doing what I always do when we talk about the recession. I'm paying attention to one of the indicators of the recession, which is the job market. And the job market appears to be freaking out a lot of the recession watchers out there because we're not saying a lot of weakness yet in the job market.
And we still have unemployment at 3.7%. We still have the weekly jobless claims at a very low level, frankly, for given how much the Fed has been tightening, still under 250,000 pretty consistently every week. Obviously there's a delay in a lot of the job data. If you were laid off this week, depending on what your job was, you may not file even an unemployment claim for weeks.
And you may end up not filing it at all if you manage to leapfrog into another new job quickly. We have over 10 million job openings. So that may happen this time around. So can I look at the job thing?
Like we always talk about John or is it just delayed and that area will get darker as we go along into 2023? Or what should we be looking at? All right, Tracy. So here is the monthly job growth average for 2022.
It's plus 392,000. Okay. Does that sound like for a century? No, that's very impressive.
That's super hot, right? No, yeah, yeah. 2021, for example, we were doing the COVID recovery was plus 562. So we're down 170,000.
We're about 30, 40% in no growth. Now here's an interesting statement though. You threw out the term on the planet right, it is at 3.7%. We did have 26,000 jobs in November to add it.
But let's just talk about the internals of this. So here's this statement and I've verbatim quoted, notable job gains occurred in November in leisure and hospitality, healthcare and government, employment declined in retail trade and then transportation and warehouse. So what fundamentally is interesting about that Tracy? First of all, notable job gains occurred in leisure, hospitality, and government, those are all services, right?
Right. If one had declined in retail trade, transportation and warehouse, those are all goods. Yeah. All right.
So the service economy is still humming along right now. And the equivalent declines that we're trying to get this on a plate rate and the price level down are coming out of the goods market, which is also true with the MIs, the manufacturing PMIs below 50 now and the service to be on above 50. So it's totally good to see what we're learning. So now let's take a look at the survey of professional forecasters and let's, I'll tell you what they have.
Okay. 23 first quarter, 0.2% GDP, 3.8% on the unemployment rate. So basically just barely ticking up from here and growth going to 0.2%. Now, if that could surge you, I gotta remind you that at the first quarter of 0.2 was minus 1.6 and the second quarter was minus 0.6, right?
Yeah. So when we usually see. So we're going to get a little bit of that at this point 2%. So that again, that's not recessionary.
Like we talked about jobs is the key thing and it might take up a 10th of a point. Not much. Now 22, quarter again, 0.2% and the judge 100. Now starts to rise up 4%.
Right. Okay. What's interesting about all of this then gets into the payrolls that people predict and the core price personal consumption expenditure, which is what the fed will put the fed funds rate 1% above it. So in the first quarter payrolls are at 80.
And the core PC is at 3.8, which means they're going to get the fed funds rate to 4.8. We're about 3.8 now. So we're going to add 100 basis points if the core PC does what it's supposed to do. By the way, it's a four and a half now.
So the fed doesn't come far. They're going to go to five. Then in the second quarter of 2022, it is 36,000 payrolls a month and the core PC is 3.2. So here's my problem with all this.
These four casters. When Tracy did we begin the super steep rate hiking? In the spring. Right.
22,000. April. When on earth has any economist told you that there's going to be a downturn seven or eight months later? Never.
Never. You have never told me that. Never told that. So why earth?
Now I'm talking about all 45 of the most special economists in the world. Why do we have a recession with 79,000 jobs in the first quarter, 36,000 a second quarter for not even a year after we start rate. This even as an economist, I'm talking as a professional economist. This is way in front running the idea that there's lags and leaves on the stuff.
Yeah. Right. So this is one thing that you and I have been writing about all year is by paying attention to payroll at 392 number. It was way hot and there was no slow down for sure this year.
And frankly, second half of next year, first half of next year, I'm not betting on a recession at all. Unlike these guys. Right. Because it again, just being like economists who's not going to get thrown under the bus here because I will get sacked.
You know, the least that I can take in the second half for sure. Yeah. So my point is why we're doing this podcast is so critical is the monthly jobs numbers and revised job numbers are all you really need to know. Because these stupid people are trying to jump in and out of votes on a not get fired in their bureaucratic world.
And this is not the, and they're actually violating their own principle, which is that it's a 12-18 month release. What these are interest rates will play out. Right. Fascinating.
I mean, I just looked at it. I was like, yeah, really? I mean, we're going to do 80,000 jobs in January. I mean, I mean, we're going to get the November 360 free stuff.
We're just going to fall off a cliff after Christmas. Right. Right. That's what I've been saying.
Even just to the general random people on Twitter who are going even more outrageous and talking about how the Fed is going to start cutting by early next year. And that's just, you know, that you're going to be a recession, that they're going to cut the rates. And I'm like, but you would need literally it all to collapse. And how is that going to happen?
We're already like mid-December. Right. And I was balling with some guys, you know, we're in their 70s, early 70s, and they're out in their houses in California. And we were talking about, you know, the rehiking.
And the work was going to do to the mortgage rate, well, that was 7%, right? Yeah. But what's the average mortgage rate out there, Tracy? After 10 years of zero rates?
Almost everyone. I think it's only 5% of people with the mortgage are above 5%. Right. And the average one is 3 and 1 half.
Yeah. It's much. The listings, the sales, the amount of people on both sides of the market that can find a deal are going to plug it. But if we look at the younger people in Phoenix, by the way, which is the hottest and worst situation, 0.4 to 0.6% of all people in Phoenix are transacting at a house.
0.4 to 0.6%. Yeah. Right. So the point is, it's just not going to happen through the housing market.
And then I'll talk about the retail sales mix. I've just looked at this also for this report on economics, I'm going to do this weekend. Low and behold, there's no sign of any slowdown in any retail category. Period.
No, not even in jewelry. And you'd think if I'm going to pull back on something, it's going to be on the jewelry. I don't have to have that. And yet, even the jewelry retailers are saying, no, we're fine.
Things are looking pretty good still. That's incredible, really. Yeah. What's incredible is the the the the drivenness of the media, social media, and actually cable and business news media and the incessant drumbeat of trying to get something and learning so people turn it to an app, right?
Yeah. Yeah. Right. And people who pessimistically want, yeah, they didn't vote for Biden, they don't want him to succeed because then they can go go golf with me and piss on me all day.
Right. Right. Right. All these people you say, hey, you know what?
What's the payroll number? And then, you know, I'd rather get the recession story off done by the first hole, right? In the next 17, right? Yeah.
Yeah. 95% of people don't say what you said, which is it's about 392 a year and there's no way we're going to 70 or 80 in another month. That's sort of a model, right? Right.
But see, this is the problem. We've got in bubbles of social media and cable watching, TV watching, and people are also in the professional account of his profession, just yammering away in their own social media bubble. And we're all walking back the basic concepts we've always believed in, which is the payroll number matters most and the lags on rate hiking by the Fed are at least 12 to 18 months. Right.
Yeah. You always say one of the other has to really, you know, I'll get an honor both, which means if it really comes in fast, the payroll numbers will roll in, we'll pick it up. We don't have to think about the projections. Those are just not really happening.
Just catch it month to month. Like we said, just try to be in the moment and change your views in the moment and don't miss out on all the madness. This is, this I'm very, we'll walk around up and down. That's going to happen.
Right. That's not when the economy is walking up and down. There's the right thing. Right thing.
Let's see how it plays out here. Nobody's ever rate like this fast as quickly and it still remains to be seen. It really matters when you put that in front of 10 years is your race. Right.
Yeah. And I do think on the housing side, there's still a lot of post-traumatic stress syndrome from, you know, Gen Xers and baby boomers about what happened in 2008 to 2012. And that's why everybody's still looking at housing again as the place where that could cause it. That could cause the recession because they're just, they're still thinking, oh, this is like it was before, when it's not anywhere close.
And we've been 15 years later after that housing bust. And what people forget is, you know, baby boomers who own their house in 2008, certainly, if they stayed in it, they certainly own it now in 2022, 2023 and it's most likely paid off now. So the scenario is a little bit changed. 15 years later, over 40% of homeowners own their houses outright now, which is a lot of money sitting there, a lot of equity, a lot of firepower that maybe was not there to that extent in the prior type of cycles too.
So I don't know, I just think people are looking at all the wrong things as to why the doom is coming and what's gonna cause it all other than the Fed tightening. They're looking for some other outside area. And I don't know, maybe it's the Bitcoin and all the stuff that's going on with FTX. Maybe that's the catalyst this time.
I don't know. But I don't know, what's the percentage of people who are invested or are invested in cryptos? I don't know. Do you know?
Yeah, we can answer that ourselves. FTX to 30 or 40 billion dollars in losses that they're catastrophic. Well, yeah, for them. Yeah, yeah.
But if you were outside of FTX, there's some people who weren't in there. Yeah, so you got from 25,000, then you lost 30, 40, 50%. But how many people did that? I don't know, right.
Not that many. Cause contagion. But I don't know. It is definitely going to be interesting.
But on the stock market side, we know that the market will try to price in any kind of recession ahead of time. So what do you do as a stock investor then as we head into 2023? We've had the big sell off here in 2022, but we've had a nice rally at the end of the year. So it's not as bad as it was a couple months ago.
And do I go into what was working for this year? Do I stay in, for instance, like an Exxon? It's up 69% year to date still. But you do get that big dividends.
Shares are still cheap. Do I go into the banks as the Fed continues to tighten? I thought that would work last year. I know you've liked some of the big banks.
We talked about it. I own Bank of America in my value investor portfolio. I think you own JP Morgan again, right? You're back in there.
Yeah. JP Morgan down about 17% year to date. So kind of near what the S&P 500 has done now. But you get that dividend and that's cheap.
Retail, I do like the retail story, but I am a little leery, even though it's holding up as we just discussed. I am a little leery about diving in there ahead of a possible slowing of the consumer. So like Ulta, a lot of people talking about that one on the beauty side. It just had a pretty solid quarter and is looking at a solid holiday season.
It was a little cautious, but that's understandable. But they're seeing pretty good numbers there. But that's trading at 21 times. So not real cheap.
I don't know. I know a lot of people are hiding out in the big drug companies. A lot of people talking about Eli Lilly right now, because year to date, it's up 32% breaking out to new highs. But I took a look at it because I haven't looked at it in a while.
P.E. is at 47 now on it, even though the assessments are being cut a bit here. So it makes it more expensive. And the dividend, not that great, 1% for Eli.
But took a look at Pfizer. That's cheaper. P.E. of just 7.9.
But earnings really expected to be cut for next year down 25%. And those are down 16.5% year to date now for Pfizer. So I don't know, John, what are you thinking about for 2023 in terms of just investing? Should we stick with what's worked like the Xsons or now things are on sale?
We can get in there. Do I try to get a dividend pair? What do I do? Well, I would throw out three ideas here.
One is the Qs. OK. Can I get one more tracker? Yeah.
I still love the most. It'll come back to your list. OK. Semiconductor ETF XSD, XSD, which is the most equal weight of the semiconductor index is done by S the Spyder State Street Group, which I've learned has done more.
The heavy lifting and getting your passive investing right for you and is reasonably cheap from an expensive ratio of respect. OK. So if we're going to throw out as a blend of the mid caps, any of the ETFs and mid cap lens, which are not the small caps, which will be more volatile. But stocks that you don't know about, just buy the blend, don't buy the value or the growth, and just buy the super low ratios.
And then stay regular with those ideas. Don't try to time in on it. And if you've allocated those three ideas once a quarter, every two months, you're probably going to put in some nice valuations on those stocks and your come out the back end of this whenever this ends, which by the way, nobody knows. And by the way, the market will, again, just like everything else will be leading it 12 to 18 months, so it'll turn around whenever that big wheel turns out there in the world.
And if you're not going to time the bottom, but you're going to be able to begin buying around both sides of the bottom and at the bottom, if you keep on with something like that. Okay, that's good advice. Yeah, I feel like I'm going to give you, I think people, you know, turn to people like me, or you like we're going to be some geniuses and figure this out. And that's just what we're going to do is we're going to work and we're going to go and do a podcast.
We're going to do them regularly and we're going to talk about the payroll data and tie our hands to it. Right. That's the job here. Everybody on our job is to do these podcasts and tell you what the payroll numbers in it, hold our language to not becoming permabares or perables.
Right. Right. Yeah. Yeah.
That's what happened. We got a pervert bear situation going on in the economy right now, right? It's not clear if we can have a pervert or situation. We do.
A couple other interesting things just about a recession next year. What are the odds that it actually gets pushed back to 2024? Like, yeah, there is a small contingent saying that they believe it won't actually start until first half of 2024. Yes, I kind of with that, I think basic problem here is you've had 12 years of asset, you know, baby boom thing, which is, you know, raise the value of my house, making a lot of money on it.
Raise the value of my stock, make value of money on it. Let me retire for that. That's around a piston bone about it. Right.
With rapidness, there's the generation below has to go to work and pay for over value houses and find over value stocks. And it turns out there's not as many of them because they move as what it was. Boom. And so there's this transition that COVID's presenting to people, which is actually pro work, pro wage, pro generation.
Yeah. You may surprise people that there's a structural flip of the switch here that COVID actually presents itself. Okay. Is not quote cyclical, right?
Right. Right. It's changed. It's, it happened in a kind of discontinuous way because of the nature of how COVID, you know, shut us all down for two years.
Yeah. So I think this is what's missing here is people not understanding structural change that's been building that, you know, accelerated and we're just kind of probably watch that play out. Yeah. Okay.
Well, yeah, I definitely think things are going to be different than what everybody is assuming, especially on things like, you know, even just basics, like mortgage rates, everybody assumes, oh, they're going to be high. And then the Fed will cut and they'll go down again and we'll be back to like 3%. Well, in the 1970s and 80s, that's not what happened. Even as the Fed did start easing, the mortgage rates remained elevated for over a decade.
So why does everyone assume this time it's just going to drop back down and, you know, we're back. We're back to the party again of rising asset prices and everything else again. I don't know. I just feel like this time maybe it is different than what we've seen over the last, you know, 10 to 20 years or more now.
And yeah, there's going to be a lot of adjustments by everybody in all asset classes, I think. I think it's fair. I mean, I think, you know, when I do returns assumptions, you know, I looked at 8% as your return on average on most of these indexes, which is the average return going back over the last number of decades, not the average return over the last five or 10 years. And yeah, that's the only thing that's going to probably happen here with rates stick around longer like they're going to, I think you're right.
And that's going to be a quote normal period that we forgot about. Right. Right. We're going to 8% on your ETFs that I threw out there.
Right. Right. Right. Or actually, I put a lot of the rates like, well, that's how you usually do, you know.
Right. Right. Or people may actually want to put money into their savings account at the bank, because they may get 5% on a savings account suddenly. Right.
That's totally different. Nobody even has a savings account anymore. So yeah. Right.
That's it. This is what people get to realize. COVID may have presented a speed up of a generational shift, where there really is a difference of opinion on everything. And, you know, unless you're going to do what we're trying to tell people to do it, and we only really, we're going to keep insisting if I ask for so people who want to do it, which is just pay attention to perils.
Right. Yeah. Yeah. Whatever it is, don't get your generational level.
Just try to pay attention to perils, because it's netting out the entirety of all these headwinds and salins for you, because what people don't understand is, yeah, there's always tailwinds and headwinds. Like, oh. Right. Right.
For sure. Housing market's going down. Well, how big? How much?
Well, you don't know. Right. So if perils numbers don't roll over, it basically isn't that big deal. That's basically the answer.
Yeah. Yeah. Yeah. Yeah.
Yeah. We're just daily, you know, our wild fire, our other body, yes they did. It's still not rallyinging the unapply rated perils. Right.
And the payroll number was 263. No. Right. Right.
I do think we're a little bit too focused on technology and those big companies and the jobs that are there. And, you know, the US economy is much larger than just, you know, these 10 big tech companies, or even just tech in general, even though it's a large sector for sure. But we know that there was overhiring at some of those places. And so the ship has to be righted somewhat.
But that doesn't mean there was overhiring at John Deere or Baker Hughes or any of these other places. So. Yeah. Our government, which is still in the goods.
Under supply of automotive players and that manufacturing growth of automotive can carry us for a good two years. Right. Right. Right.
Yeah. Yeah. Yeah. You have, and then you have the China story where they finally, you know, get out of probate.
They have an overdrive way to do. They're trying to get their herd immunity over there and they get out of this. Yeah. Yeah.
Yeah. So yeah, this is the problem. I mean, you know, I was thinking about the United Show yesterday, but you know, Tesla and Elon Musk, you would think that Tesla and Elon Musk are the only cars being bought right now. Right.
Right. And you know, the other day I get a show on, uh, uh, philanthropist, which is, you know, got 15 brands of the, uh, Jeep Chrysler, all those things. Yeah. How strange a world we live in, how skewed your perspective is.
In the next, by 2025, which is by the way, only three years away, they will have completely revamped all 14 brands to 100% electric in Europe and 50% electric United States. And they will have revamped 55 actual car things and all four chassis for shocks, the middle delight to small. Right. Wow.
Yeah. Because you didn't hear that because you heard nonstop 24 seven about Tesla and Twitter and Musk. Yeah. Yeah.
For sure. What has happened is that, you know, some of these, you know, people are figuring out, Hey, you know, I get on Facebook and only then just, you know, last year, like on Twitter and put out, you know, five bazillion tweets and convince you all that they're happening. Right. Right.
And you're like, Oh, you know, you know, I must be running the world. No, he's not. He's just interrupt waiting. It's going to lock.
Right. For sure. Well, that's where, you know, good stock investors look for opportunities in what you just said. Outside of Tesla, there are going to be opportunities in electric vehicles, space, right?
Alternative energy, all of this stuff. And there are going to be some good stocks that people are going to want to be in other than Tesla. Yeah. If I slant this $15 a share, I'll be dumb.
Yeah. Call me the dumbest guy ever. I'll probably think about it. Okay.
So I guess that that's concluding our discussion for this year's version. So we didn't really conclude if there is going to be a recession in 2023, but there may be, but not in the first half, I guess, is what we concluded. That it would probably come in the second half if it comes, and we have to watch the payrolls and it's all about the jobs. That's it.
Yeah. Okay. So that makes sense. And we will regroup next year to discuss this again, as we always do.
We do this show more than once a year. So we will be regrouping. You want to be sure to subscribe to get, you know, all of the episodes. You can get us on Apple Podcasts and on Spotify.
But let me give you the tickers of what we talked about today, because it's kind of extensive this week. So I did mention Eli Lilly. It's blasting out to new highs, ticker, L-L-Y. Then there was Pfizer, ticker P-F-E.
We talked briefly about Exxon, ticker, X-O-M, JP Morgan Chase on the banking side, JPM, and we mentioned Ulta, ticker, U-L-T-A. I own Ulta in my own personal portfolio, as many of you know. Then John talked about, you know, just keeping it basic with some ETFs. He likes the triple Qs for 2023, QQQ is the ticker there.
Then the semiconductor equal weight index is X as an X-ray, S as in Sam, D as in David. Then he mentioned just buying a blended, you know, just regular mid-cap. And if you want to keep your expenses down, you might consider the Vanguard mid-cap ETF. It's just the basic one, ticker V as in Victor O.
Just the two letters, V-O, has an expense ratio of just 0.17% for the Vanguard. But that's about it. And as I said, you want to make sure you are getting us. So get us on Apple Podcasts, Spotify, Amazon Music, and we'll have one more episode before we get into 2023.
Don't want to miss that one. And as always, I'll see you again next week with some more stocks. This material is being provided for informational purposes only, and nothing herein constitutes investment, legal accounting, or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this podcast.
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