It is hard to believe the third quarter is rapidly drawing to a close already. The quarter is not ending on a high note for either the economy or the markets.
The Fed is set to hike rates yet again here on Wednesday. The nice rally we had seen off the mid-June lows has fizzled out over the past five weeks. In addition, the Atlanta Fed GDPNow's projection for 2.6% growth in the third quarter that it issued at the start of September is now down to 0.3%. The latest revision downward was triggered by poor housing start numbers Tuesday. I would not be surprised if that GDP projection is negative by the time the month ends.
One thing I do both as an investor and in performing research for my columns is to read through two to four transcripts of earning calls each day. It is something I think more individual investors should do as part of their investment routine. These quarterly updates can give an investor solid insight into how individual sectors are doing and where the economy likely is heading. The news on both fronts this quarter has not been encouraging.
When GDP contracted in the first quarter, the poor performance was largely blamed on "seasonal factors." By the time the second quarter produced negative GDP levels, that phrase had joined "temporary" and "transitory" in the lexicon of debunked phrases investors have been misled by over the past year or two. This is even as the country was not in an "official" recession yet. In the second quarter, investors who read through transcripts started to encounter more cautionary statements by company management and hiring plans started to be "reduced" at companies such as Microsoft MSFT.
During the second quarter forward guidance started to be cut significantly across a variety of industries. Factors cited for the reduced outlook were quite similar across sectors. A slowing economy, a beleaguered customer, continued supply chain challenges, foreign currency impacts from a strong dollar and rising input costs consistently were among them. The first and second quarters were challenging. The third quarter is likely to give investors the blues.
We should start to see to a wider extent the impact of recent interest rate hikes in quarterly results, especially in rate-dependent sectors such as housing. The lack of consumer buying power thanks to the ravages of inflation should also be more evident.
I expect loan delinquency rates to start to move up when banks report results to kick off third-quarter earnings season. I also believe many retailers will report further "inventory adjustments" this quarter as the holiday season is shaping up to be a dud this year. I also think we will start to see more signs of layoffs announced to combat falling profit margins and ebbing demand. These announcements likely will accelerate in the fourth quarter as the country officially goes into recession.
Not exactly a sanguine view of the market, but it is hard to come up with a more likely scenario after reading through scores of second-quarter earnings transcripts. That is why my portfolio continues to have a 25% allocation to cash, I am shorting more individual stocks that will be hit further in a recession scenario, and the defensive health care sector has the biggest weighting in that portfolio.
Not exactly a message of cheer as the quarter comes to a close, but a prudent one.