Marketplace Roundtable #59: Leading Indicators Don't Point To The 'All Clear' Sign

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Eric Basmajian rejoins the Marketplace Roundtable Podcast to discuss his investing experience as reflected in the EPB Macro Research service.

Basmajian's approach is to separate the economy into two main phases: periods where growth is accelerating versus periods where growth is decelerating. "What's nice about that approach is it's pretty objective," says Eric. "There's no opinion in an acceleration or a deceleration; it's more of a fact-based characterization."

During periods when growth is decelerating, his approach is to adopt a defensive investment posture characterized by an overweight allocation to fixed income and defensive stocks such as utilities, health care, and consumer staples. When growth accelerates, Eric over-allocates to more cyclical, risk-sensitive stocks and away from fixed income.

How to correctly identify the inflection points in the economic cycle? EPB uses a process of leading indicators and then adopts its investment approach based on these metrics. Right now, "the market is starting to try to shift to a stage of acceleration," marked by an outperformance of cyclical assets.

But the leading indicators do not corroborate this sentiment. "We still have an industrial slowdown," which carries its own sets of risks, specifically employment. Here, leading indicators "are actually moving to the lowest growth rate since 2009." The loss of jobs, particularly in manufacturing, is preventing EPB from assigning the "all clear" signal for buying risk assets.

To navigate these risks, investors should allocate to the short-end of the yield curve. There are several short-term Treasury ETFs that can accomplish this. Industrial and material stocks should best be avoided, as should shares of cyclical companies.

Contents:

  • 2:15 - Discuss your approach to investing
  • 4:00 - What's our status in the current cycle?
  • 6:45 - What about the argument that manufacturing is not as important anymore?
  • 9:45 - Is there any hope for a resurgence in manufacturing?
  • 11:30 - Important leading indicators
  • 17:00 - Outlook for interest rates and global growth
  • 24:15 - Concerns about the market/portfolio
  • 29:45 - Recommended investments

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