The Tale of Two Charts

By Morgia Wealth Management on February 12, 2024

What do you do when two sets of data offer conclusions that seem to contradict each other? How do you even reconcile them? After all, both charts show factual, accurate data.

This was the exact position our team found ourselves in after the summer of 2022. The first nine months of 2022 were a terrible time for the stock and bond markets, especially after the growth from April 2020 through 2021.

In 2022, the market began to feel the impact of inflation. Nearly all areas of the economy were impacted by rising prices. The rise in prices seemed to be a result of fiscal stimulus and monetary policy to help consumers and business weather the economic slowdown caused by the COVID pandemic. The rise in prices was also a result of supply chain disruption that took place when businesses shut down during the peak of COVID. For many goods and services, there simply wasn’t any inventory or, for services, people to provide them. Too much new money chasing too few goods caused prices to rise.

In 2022, inflation was slow to come down and there was a growing concern that it would start to have a significant negative impact on the economy. The Federal Reserve took action to help cool the economy and lower inflation by raising interest rates. This had two big impacts.

1) Inflation certainly did start to cool and the rate of price increases slowed over a long period of time.

2) Rising interest rates increased concerns that the economy could slow down to the point where a recession was possible.

Here comes our data dilemma. This chart here shows the performance of the S&P 500 from the end of the COVID correction March/April 2020 to January 2024.

The market was very strong from April 2020 to December 2022 with steady increases and very few material corrections. In December 2022, the market appeared to finally price in the impact of increasing interest rates and high inflation. Stocks and bonds had very negative returns in 2022.

In October of 2022, investors appeared to think differently about the future. At that point, inflation was cooling, employment was still strong and consumer spending was solid. The performance of the S&P 500 from October 2022 to January 2024 certainly was choppy, but the highs were successively higher and the lows were not as low. The trendline was moving up. 2023 ended up being a solid year with a good return in the stock market.

So, what was the other data set that was hard to reconcile? This chart shows Leading Economic Indicators.

Economic Indicators are data points that are measured and tracked monthly which provide insight into what might be coming for the economy. Usually, negative economic indicators suggest a weakening economy and a possible recession. All indicators in 2023 pointed to negative results, but the economy was more resilient and stayed strong.

How can economic indicators point to a possible recession while the market seems to have shrugged that concern off? One conclusion is that economists were still concerned about the strength of the economy, but investors looked at the prices of stocks and believed that prices had come down enough during 2022 and were relatively cheap based on earnings. Investors started to move cash back into the market and prices started to move up again.

As investors, we watch price very closely and balance changes in stock prices against economic data points. These data points, like these in this chart, are important for us to consider. They should make us skeptical and ready to take defensive action. They help us create a plan for defense, however, we don’t implement that plan until we see price action that suggests investors are growing worried about the stock market. During 2023 when the market was moving up, we had a plan thanks to these economic indicators, but we didn’t need to implement it.