I am human, so occasionally, I can question my own market opinions, especially given how the market has reacted to bad news and uncertainty lately. Anytime I have these thoughts, I go back to the core principles we use to make decisions for our clients. The DATA!
I decided to get the pulse of local businesses, so I called a client that owns a plumbing supply company. Are they seeing an increase in 30-day late payments? The latest data has shown that this is happening at the consumer level with credit cards, so I was interested to see what they saw. I chose this client because they run a fantastic business in one of the best areas for real estate. He said that in the last two months, the number of customers on the list of payments over 30 days late has more than doubled. We also discussed that they expect this trend to worsen in the coming slowdown. I made three more calls in different parts of the country and received the same sentiment. When I hung up the phone, I thought to myself that things might be even worse than I thought.
One of the hardest things for investors to understand is why the stock market is not reacting to a weaker economy and weaker earnings. My answer is sometimes the market reaction takes time, but in my honest opinion, the fundamentals will always matter.
Currently, there is a tug-of-war between the bond and stock markets. The bond market says to head for cover, and the stock market says the coast is clear. But, unfortunately, they both cannot be correct. By this summer, we will find out who is right. If the bond market is right, we may see one of the most challenging macro environments since the great recession of 2008. If you don't believe me, look at Credit Default Swaps (CDS) for the U.S. Treasury.
Over the last 25 years, I have learned the hard way not to bet against the credit markets, so for my clients, I am not.