History often rhymes—but what history?

By David Wismer

I was one of the relatively few viewers who watched the MLB All-Star Game last week. The game took place on July 11 at Seattle’s T-Mobile Park.

The game was notable for some great defensive plays, a dramatic finish, and the fact the National League won, snapping the string of nine consecutive victories for the American League.

However, according to Sports Media Watch , the game had a record-low 3.9 national rating and about 7 million viewers on FOX, “down 7% from the previous lows set last year. … All-Star viewership has now hit a new low in five of the past seven years the game has been played. …”

One factor hurting this year’s TV ratings was the absence of several major stars, due to injuries. The list included Clayton Kershaw (Los Angeles Dodgers), Mike Trout (Los Angeles Angels), and Aaron Judge (New York Yankees).

As a die-hard Yankees fan, Judge’s lingering foot/toe injury has been troubling, keeping him out of the lineup since the game on June 3 when he was hurt. I am struck by its resemblance to prior Yankees injuries throughout history.

While the Yankees have had dozens of great players over the past 100 years, to my mind there have been only three who have been “larger than life,” due to their physical stature, on-field accomplishments, and huge fan following: Babe Ruth, Mickey Mantle, and—arguably—today’s Aaron Judge.

And all three suffered severe injuries that can be attributed to encounters with a manufactured object: Ruth ran into an outfield wall in 1924 and was knocked unconscious; Mantle famously tore up his knee by tripping on an underground outfield sprinkler line in 1951; and Judge injured a toe ligament in a freakish manner, crashing through the poorly constructed right-field bullpen door in a game at Dodger Stadium (he actually made the catch on the play).

Yankees fans can only hope Judge’s injury will be resolved soon—and that “history will rhyme” as he goes on (like Ruth and Mantle) to complete a Hall of Fame-worthy career.

Historical precedents for today’s market debate?

I can remember many times in recent history when analysts differed substantially on their points of view regarding future market direction. It is much harder to remember situations when investment professionals have disagreed so much on the trajectory of the economy and how that will ultimately impact markets.

The phrase “History doesn't repeat itself, but it often rhymes” is frequently used in political, foreign policy, and market/economic analysis. However, the challenge now for many is identifying which historical precedent to reference when forming outlooks for the remainder of 2023 and into 2024. (See last week’s In My Opinion article by Will Hubbard, “A plot twist year in finance.” )

The questions on the table include the following:

·????????Did last week’s consumer price index (CPI) report signify a turning point for the Federal Reserve’s fight against inflation? (The headline inflation rate has fallen for?12 straight months? after peaking at 9.1% in June 2022.)

·????????Related to the inflation fight, is there a good chance now that the Fed will opt for a “one and done” approach, meaning a single rate increase in July followed by a pause on further rate hikes? Might there even be rate cuts in late 2023 or early 2024? (Fed officials now see the fed funds rate peaking at 5.6% this year, according to the latest “dot plot” —with two additional rate hikes projected, but always subject to new data.)

·????????Is a recession likely in the second half of 2023? If so, will it be a “soft-landing” recession or one with significant declines in GDP, wage growth, employment, real estate values, and equities?

·????????Will the rise of technologies related to artificial intelligence become a game changer for the corporate earnings picture—at least in the mega-cap tech sector? (FactSet currently projects negative earnings growth for Q2 2023, down 7.1%, with something of a fourth-quarter rebound for full-year 2023 earnings growth of 0.6%.)

·????????How will the global geopolitical and economic picture impact the U.S. economy—particularly China’s economy and developments in the Ukraine conflict?

·????????Will the U.S. equity market’s current momentum hold up through the end of the year—or give back a good portion of gains due to a weakening economic picture?

·????????How will the U.S. consumer respond during the many variations of the themes listed above? (The University of Michigan’s latest reading on consumer sentiment, while still below historical averages, reached its most favorable reading since September 2021 in July’s preliminary report.)

For investors, perhaps the simplest answer is that equity markets are a discounting mechanism, and all of the possible permutations of the answers to the questions above have been factored into the latest market pricing.

That would be an optimistic assessment, indeed, supported by the S&P 500 recently climbing above 4,500 for the first time in more than 15 months.

And the bulls point to “history rhyming” in terms of the outstanding year-to-date 2023 performance of the S&P 500 through the end of last week. Market technician Charlie Bilello produced the following analysis of what might be expected for the full year after such a positive start to the first 132 trading days.

On the flip side, well-respected analyst Tony Dwyer of Canaccord Genuity, a contributor to Proactive Advisor Magazine , has been warning for months about how history strongly indicates that a recession is almost inevitable in 2023.

Dwyer wrote in late April , “The current (1) U.S. Treasury yield-curve inversions, (2) indicators making up The Conference Board Leading Economic Index, (3) Commercial & Industrial lending standards, and (4) Employment Trends Index are all at levels associated with being in or near recession.”

In a July note he admitted his team has perhaps been “too skeptical”?in its market view, but still believes that “based on history, the money-based indicators continue to suggest a coming?recession.”

Even the generally bullish Mr. Bilello understands the risk of a recession, noting that “the last 3 times ISM Manufacturing was this low, the US economy was in or about to be in a recession. You have to go back to 1995-96 to find a lower reading with no recession.”

Where should investors look for answers?

After digesting about a dozen midyear outlooks from a wide variety of financial institutions, it is clear to me that no definitive assessment of future market/economic outcomes exists for now (not a surprise—it never does).

I will echo Mr. Hubbard’s assessment, which is consistently voiced in this space: The best solution for investors is to stick with a disciplined investment plan, composed of multiple diversified risk-managed strategies “that can respond to market changes and continuously manage for the risk and opportunity present in all market environments.”

That way, no matter which way the market “rhymes” with history, investors should be well prepared.