Numbers and Narratives

I’ve always admired engineers. It fascinates me that roads, buildings and planes were all at some point ideas on paper--their construction reviewed and certified by engineers who ultimately came to the conclusion that ‘yep, that’ll work.’ Engineering isn’t subject to lot of debate. There is certainty in the numbers, and because of it, we live in confidence.  

The financial markets have numbers, too. But here, virtually every number is subject to interpretation.  This interpretation ends up becoming a narrative generated by a select few through which the vast majority of us interpret our world. Two years ago, the specter of 4% inflation would have generated shrieks of terror across Wall Street. Today, a 4% inflation rate would likely be met with jubilation as great progress towards the Fed’s 2% target rate.  Same number, different narrative.

We have a lot going on today. Numbers and narratives are everywhere. The current market decline represents the 7^th correction of greater than 20% since I started my career in 1985. I can tell you, every one of them was accompanied by a lot of narratives with both the most pessimistic and optimistic proving to be wrong. The reality has always fallen somewhere in the middle. 

This has been a difficult 17 months -- tough medicine no matter the level of sugar applied. Now would likely be a good time to move past the emotions and look strictly at the numbers. Facts ultimately trump the narrative every time.

• The average bear market lasts 16 months. We are on month 18.^[1]
• There have been over 70 Federal Budget battles, each one ended with a compromise. ¹
• Going back to the 1980’s the Federal Reserve has never increased interest rates to this level with this much speed. Public comments by Chairman Powell now indicate a potential pause. ¹
• While the headline inflation number is still high…
  • The underlying costs of materials has reversed course and headed lower ¹
  • The cost of global shipping, a leading indicator, has fallen sharply ¹
  • Layoffs are increasingly in the headlines; higher unemployment reduces the wage pressure of a tight labor market ¹

Taken together, I believe these numbers suggest that we are nearing the end of a very difficult period in our financial markets. Here’s a few more numbers that suggest, after sitting through all this, we should probably hang around.  

• The average return of the S&P 500 for the first 12 and 24 months after the last Federal Reserve rate increase are 14.4% and 25.9%, respectively. ¹
• The average return following bear markets post-WWII is 43.4% after one year and 62.2% after two years. ¹

Based on these, I feel the recovery will be worth the wait.

^[1] https://www.raymondjames.com/clakleywm/insights/2023/04/17/time-is-on-our-side-webinar-replay

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