October Insights: The Boy Who Cried Wolf

The Boy Who Cried Wolf

You've heard this one before: A village picks a boy to watch over the sheep. The boy is supposed to yell “Wolf!” if a wolf comes around and the townspeople will come running to save the sheep. The boy watches regularly and nothing happens to the sheep, and finally out of boredom, he decides to cry, “Wolf!” The people come, but there is no wolf. The boy thinks it is funny even though he gets in trouble, so he does it again and again. One day when a wolf finally arrives, the boy yells and yells but no one comes; the townspeople were not going to be fooled by the boy again. The wolf eats all the sheep.

I was reminded of this fable last month as once again the Wall Street pundits cry, “Recession!” or at least economic slowdown. As we have chronicled already, this incorrect call has been going on at least since the beginning of 2023. They will not admit that they are wrong, but will keep making the same call until it is finally right. It may be 2030 by that time, but then they will crow about how right they were. “See, I told you in late 2022 a recession was coming, and now in the year 2030 it is happening! I was right all long.”

The danger now is not that people are still listening to the doomsayers, but that they are becoming like those townspeople: They have come running so many times for the false warnings that they may ignore them when the wolf finally comes.

This time, unlike most of this period, there are some signs that slowing could be occurring. A bad jobs report for July took unemployment to 4.3 percent, which is not high historically, but higher than it has been for some time. Then, throughout the first week of September we heard that everything hung on the August jobs report, which came in okay – not great, but not bad. The unemployment rate went down to 4.2 percent. The world is not ending after all, but things may be slowing down.

GDP for the second quarter came in at 3 percent, and as of September 9, the Atlanta Fed’s GDPNow says our current run rate is 2.5 percent. That is slower. We are moving from the recovery phase of the economic cycle to mid-cycle. In other words, we are getting back to normal with a growth rate around 2 to 2.5 percent. That isn’t a recession and it isn’t even a “soft landing,” it is the normal everyday not-booming-or-crashing run rate.

What does this mean for markets? As painful as it may be in the immediate term, this two steps forward, and one step back in markets is healthy. We are seeing signs that the long-awaited rotation away from big tech toward the rest of the world seems to be slowly happening. While the entire market has gyrated up and down, large value stocks, as represented by the Russell 1000 Value index, has made higher highs and thus far higher lows, while large growth stocks failed to rebound above the highs from earlier this summer before their fall last week.

The dollar has weakened, which provides a tailwind to U.S. investors who are investing overseas. This also helps the diversified portfolio. There is plenty to be constructive about.

The constant calls for a recession are getting very tiresome. However, prudent investors cannot become like the townspeople who simply stopped listening; we must pay attention to the data and continue to refute the pundits until the data changes and we finally say this time they are right. The wolf will come for our sheep, but he isn’t here yet, no matter what that silly boy keeps crying.