Flat GDP and
Sectors hurting one by one:
Rolling recession

A recent FiKu discussed what a recession is: 2 consecutive quarters of declining GDP.

Another recent article discussed the dreaded phenomenon of Stagflation.

Wall Street research and investment firm Zacks Investment Management recently shared an article discussing what we may be experiencing now: a rolling recession.

According to the article from Zacks, a rolling recession happens when GDP is flat or slightly positive, indicating some sectors of the economy are growing, while others are either flat or contracting.

Zacks identifies that, right now, services-related sectors are outpacing manufacturing. The increases to interest rates are hurting the manufacturing sectors harder than services. This is because “consumers stopped buying hard goods in late June and began concentrating their spending on services, mainly travel and leisure.” Hard goods were too pricey to buy, and after so many months of social distancing and lock downs, people may have simply valued interactive experiences over products.

In a separate writing, Zacks discusses how the key ingredient here is the Terminal Rate. The Terminal Rate is “the point at which the Fed will stop increasing the Federal Funds Rate.” The problem is, there is looming uncertainty about how high the Fed might push interest rates, and how fast. They also write that “until interest rates are done going higher, any growth will come from individual companies more than overall sectors.”

Not coincidentally, the current market cycle has been met with an uncommon occurrence: active management outperforming the market.

Active management involves an investment advisor selecting stocks for a mutual fund or ETF. If we are in a time when individual companies can be expected to outperform sectors, competent active managers may be expected to outperform the benchmarks the funds use to gauge performance.

Interestingly, according to a recent Wall Street Journal article, “nearly half of large-cap U.S. stock-picking funds beat the S&P 500 during the brutal selloff in the first half of the year, putting active managers on pace for their best year since 2009.”

Over time, active management is a near guarantee of underperformance relative to indexes. Active management of a growth portfolio is likely a losing proposition. According to data from SPIVA, over the last 15 years, 89.38% of actively managed funds underperformed the S&P 500. That’s a lot of underperformance.

However, for many retirees, matching the performance of the S&P 500 is not the top priority. Rather, avoiding catastrophic losses and sequence of returns risk means more to some retired households than participating fully in the highs (and lows) of the S&P 500.

Risk management through passive index funds is typically done through buying funds tracking stock indexes for growth potential, and funds tracking bond indexes for protection against loss. This year has been a challenging time for this strategy.

With interest rates rising, bond funds have failed to provide a safety net for portfolios invested in funds versus individual stocks and bonds. In fact, the S&P Aggregate Bond Index is down 12.34% as of this writing from one year ago.

If you are concerned about managing risk within your portfolio through active management or other risk-managed growth strategies, we would love to hear from you.