Scott Kahan on Investing: Waiting for Godot?

Scott Kahan on Investing: Waiting for Godot? Since we last checked in with Chappaqua’s Scott Kahan, Jay Powell’s Federal Reserve has raised short term rates by 75 basis points in three consecutive months to fight inflation. With the market continuing its downward correction today we checked in with Scott “Taking the Emotions Out of Investing” Kahan this morning for his take on managing your portfolio. Scott is a Certified Financial Planner professional and President of Financial Asset Management Corp. in Chappaqua and NYC.

How bad are things?

We’re in volatile times. Inflation and the Federal Reserve’s actions to combat it are the driving forces. But people should not overreact. This is the business cycle.

Are we in, out or waiting for Godot when it comes to RECESSION

Not long ago the talk was that we are in a recession because the economy saw two consecutive quarters of negative growth – which is often referred to as “the technical definition” of a recession. But then, as now, the economy was sending conflicting signals. Cooler heads pointed to the fact that job growth continued, a counter economic indicator to recession concerns. Cooler heads prevailed at the time.

Now we see job growth slowing and with an inverted yield curve (where short-term rates are higher than long term rates) recession is back in the conversation. And the new questions are when and how severe? While Godot never came for Vladimir or Estragon – recessions do happen. But that needn’t worry investors.

Why is that?

Powell is doing what he can to fight inflation. Some say he acted late. Others are concerned he may overdo it, that there is a lag time before rates slow the economy. These voices are calling for Powell to slow his rate increases because he may not need to raise them so high that they will cause a recession. It remains to be seen if Powell can soft land this economy. But if he does – Godot may never show up after all.

Has the market already priced in a recession?

That was my next point. We saw a big sell-off in the market in June followed by a July rally. Now we’re testing June lows. But the stock market is forward looking and whether the full repricing is reflected in today’s market or not – the repricing process is happening.

The good news for investors who don’t panic is that when and if we enter a recession, historically that is a good time to buy stocks because the market tends to rise in a recession – anticipating its end.

How bad might this recession be – when and if…

Nobody knows but there are some factors we can look at with relief. One is the housing market. Although rising mortgage rates will depress home prices, housing supply has been very low even as home prices peaked earlier this year – we don’t see a real estate crash. That’s a good thing. We also see inflation stabilizing that’s encouraging those voices calling for the Fed to be patient moving forward.

Finally, despite a variety of issues contributing to our current inflation rate including the war in Ukraine, remember the core force behind inflation was the supply chain. And retailers like Walmart are reporting supplies increasing, warehouses filling up and that very well could result in price cuts.

What should investors do now?

We manage our client’s portfolios with the discipline of maintaining the asset allocations formulated to suit their financial plans whether they are saving for college, to buy a new house, for retirement, or in retirement. With both bond and stock prices down most of our clients’ portfolios have remained in balance. Which obviously would not happen if dramatic movement up or down occurred, as it typically does, in just one of those asset classes.

But are you moving within asset classes to protect against recession?

Not across the board. You may hear experts talk about moving into consumer stocks, utilities, and health care that tend to hold up better in recessions. For us this would mean moving out of the traditional growth and value index funds or ETFs we buy and moving into sector funds.

I used to work sector funds into my client’s mix but over time I realized that playing sector funds is inherently a form of timing the market, which goes against our core principles. You see, you may move into recession resistant stocks (there’s no such thing as recession proof) but then you must get out at the right time. Additionally, the typical allocation into a sector fund is too small to have much of an impact on your portfolio. While a big sector play is too risky.

How about the fixed income side of your client’s portfolios?

If your bond funds have taken a hit, one thing you can do is reinvest your proceeds back into that fund. You’re buying new shares at lower prices. This is a perfect time to reinvest in bonds. Also, holders of bond funds will soon see yields rising even while principal is down. This is because managers are constantly replenishing their portfolios with new issues, with interest rates rising this means they are replacing old bonds with new ones at higher yields.

It’s just as important to have a long-term mentality with bonds as it is with stocks. Because from here, as painful a time as it is for bondholders, they can expect increasing yields and then significant returns when the Fed starts lowering short term rates again.

Final Thoughts?

I think people must accept that what is happening now is short term. It may be six months, a year, two years. But when you look back on these years it will seem like a blip. So, think long term. When you try to play the daily sentiment, you are often wrong. The experts are wrong too – they just get to change their opinion whenever things change, and nobody remembers what they said yesterday. For instance, Golden Sachs recently lowered their projected S&P 500 number from 4300 earlier this year to 3600, a drop of 16%.