Gene Goldman is Chief Investment Officer & Director of Research for Cetera Investment Management. He is responsible for the strategic direction and continued growth of the firm’s research offerings. Gene has more than 28 years of experience in the development of investment strategies, money manager research and overseeing investment analysts. He is frequently cited in a range of national media outlets including The Wall Street Journal, Bloomberg News, The New York Times, Forbes, and Reuters and he is a regular guest on high-profile news networks including CNBC and Fox Business News.
Mr. Goldman earned his Bachelor of Science in engineering from Worcester Polytechnic Institute and his Master of Business Administration with a concentration in finance from Northeastern University. He is a Chartered Financial Analyst® (CFA).
Gene presented a firehose of great information. We were lucky to get notes from two members: Michelle Lee and Hal Beals.
Key Points Summary by Michelle Lee
The 2020 recession is the shortest recession after the longest economic expansion on record and it is a service led recession.
We are currently facing quadruple peaks.
- Peak Economic Growth: GDP growth was 6.7% in Q2 while it was 2.0% for Q3. Although the growth has slowed down, possibility of recession is <1%. The causes for the lower growth is manifold:
- Thermal coal prices in China has skyrocketed causing rolling blackout, thus manufacturing is contracting and limiting products export. US retailers do not have enough products to replenish their shelves and hence lower sales.
- There is less positive data surprise in the US stock markets to propel higher stock prices.
- Inflation caused by tight labor market and high oil prices. Oil suppliers are not responding to the pricing signal to make capital investment to increase supply. They are taking a wait and see approach in view of the clean energy policies.
- Peak Stimulus
The accommodating monetary policy will be changed. The Fed will reduce the monthly purchase of treasury and mortgage backed securities from banks gradually (QE tapering). Gene thinks that QE will end April – June 2022. He also predicts that the Fed will raise rate twice in 2022.
- Peak Earnings
FactSet forecast that S&P 500 year-to-year earnings growth will drop from 92.4% in Q221 to 3.6% in Q222. Corporate earnings growth is impacted by supply chain issue and higher labor costs. For example, P&G has revised its forecast for 2022 supply chain cost from $500m to $1.2b.
- Peak Disruption
With vaccination, labor shortage has eased. Some of the early retirees start to come back. Increased of immigration will also help.
The stock market valuation is high, forward 12-month forward P/E at 21.63x comparing to historical average of 16.27x. We may see correction (<10% down) but not bear market (>20% down) in view of massive stimulus, more reopenings, unprecedented surge in consumer net worth, supply chain problems ease and business cycle dynamics.
Key Points Summary by Hal Beals:
Gene Goldman of Cetera Investment Management’s intention was to calm nervous club members and guests concerned with the current disturbances of the US financial markets.
He opened with a graph showing the number of months of each economic expansion and recession since the end of WWll. The current expansion has lasted 128 months, the longest in history and the Covid 19 recession of 2020 was the shortest at 2 months.
Today’s disturbances are a reflection of these factors: Economic Growth, Inflation, the Federal Reserve and Washington Disfunction. Other factors are wage increases, labor shortages and supply chain bottlenecks His remaining remarks delved into each.
Economic Growth is slowing. China’s actions on coal purchases, desire to clean their air for the Olympics and falling house prices along with US wage increases, supply chain problems and the fear of interest rate increases is reducing estimates of GDP growth.
Inflation is increasing. Pent up purchasing funded by the Covid income stimulus by the government in 2020-21, combined with supply chain problems with more money chasing fewer goods is the cause. It is temporary.
The Federal Reserve functions to control inflation and increase employment. Inflation control is the Fed’s power to increase interest rates that raises the cost of borrowing, home loan and credit card interest. Students of the Fed think that there is a 98% chance that the Fed will raise rates slowly beginning in 2022.
Washington Disfunction was on the front pages, TV news, and social media for the past 2 months with Senators Sinema and Manchin as the poster children for delay and really big delay in the US Senate to move important bi-partisan infrastructure legislation through. The two compromised recently and indicated that they are able to compromise for the good of the nation.
As is typical with Wall Street professionals, the longer term message is upbeat because, as in the past, recessions lead to expansions which lead to irrational exuberance which produces another recession. Live long enough, stay invested, be patient and avoid speculation and all will be well. It is simple, but this Scribe can attest to its wisdom.