There’s been much discussion on FS insider recently of the business cycle and the possibility of a recession in 2017. This time, PFS Group's Chris Puplava gave us his thoughts about where everything is going, and what he thinks investors need to watch out for to determine the direction of the economy.
The Problem With Buy and Hold
“Most of the investment community preaches buy-and-hold. The problem with buy-and-hold is, it’s predicated on the precept that you have an indefinite horizon.”
This is flawed, he noted, because it doesn’t take into account the possibility of entering retirement at a bad point in economic activity, such as 2000, where the stock market didn’t go anywhere for 13 years.
Not everyone has the same time horizon, he added, and if an investor just entered retirement and is faced with the possibility of a bear market or recession, then that person absolutely wants to pay attention to the business cycle when it comes to how they invest and the level of risk they take.
“In my view, the business cycle is extremely important, because a lot of it dictates returns for asset classes,” he said.
Speaking at the Financial Sense Investment Strategy Conference last week, Puplava went through the basics of "business-cycle investing" and also showed a myriad of economic data pointing towards a possible US recession as early as next year. Here's a short 4-minute clip from our recent podcast interview to hear what he had to say:
Business Cycle Investing 101
When it comes to knowing where we are in the business cycle—early, mid, or late—Puplava said to watch the dynamic between employers and employees since this affects both profits and consumer spending. Typically, employers do best in the beginning of the cycle, with corporate profits expanding rapidly, and then, as the business cycle matures, employees do better as wages increase.
This is part of business-cycle investing 101 since these two areas—wages and profits—have wide-reaching implications for which sectors and asset classes to own and which to reduce.
“At the end of a business cycle, you typically see corporations’ and employers’ profit margins start to go down,” Puplava said. “That’s how you can tell you’re … at the tipping point going from mid to late expansion.”
Here's one of the slides he presented showing this relationship over time.
Right now, corporate profits are in a clear downtrend while employee wages are increasing. This is good for employees until companies are forced to lay off workers. Once that happens, a recession is near and investors want to reduce risk in their portfolios.
“I have a lot of concerns going into 2017,” Puplava said. “To me, the name of the game is defense, and I would filter out any noise or notion of bullishness for the US economy unless we see employment stabilize and actually accelerate higher.”
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