Transcript: Recession or not, fundamentals remain key to investing
Be aware of macroeconomics, but remain focused on long-term fundamentals, says Dustin Haygood of Aristotle Capital Management.
- September 20, 2022 September 20, 2022
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought you by Investment Executive and powered by Canada Life.
For today’s Soundbites, we speak with Dustin Haygood, client portfolio manager with Aristotle Capital Management, about whether the U.S. economy is already in a recession. We talked about job growth and where opportunities are for investors.
And we started by asking how he defines a recession.
Dustin Haygood (DH): So, there has been a lot of debate in the U.S. about whether the economy is in a recession or if it soon will be in one. The National Bureau of Economic Research is the arbiter, and they haven’t weighed in on this yet. It takes time for them to do an analysis on what the economy was experiencing. And economic data is often revised, sometimes significantly after it’s initially released. GDP declines in the first and second quarter, they were small. And after revisions to that and other data, NBER may well decide that the U.S. economy wasn’t in an official recession during the first half of the year. If that’s the case, we likely have the currently very strong consumer to thank for that. Consumer spending is the main driver of GDP in America and it’s held up well this year, even with depressed sentiment and inflation which has eroded purchasing power. Over the last two years, consumers have saved almost $2 trillion. That’s allowed them to dip into those savings to purchase goods. The level of extreme saving, it’s not sustainable. But what could keep consumers spending is an uptick in wages. Job openings right now well exceed the number of unemployed workers. And if wage inflation starts to outpace price inflation, that would boost the purchasing power of households.
DH: Inflation expectations really depend on the federal reserve’s ability to remain committed to tighter monetary policy. There’s a lot of disagreement on how inflation came to be. But there’s very little difference of opinion on how to bring inflation down. It’s through raising interest rates, and the Fed unwinding its balance sheet. It takes a lot of political willpower to tighten monetary policy, slow down the economy, and cause unemployment to increase. But, given what we’ve been hearing from Fed chair Powell lately, there’s some reason to be cautiously optimistic that the Fed will follow through on its path towards tighter monetary policy.
Company names he likes.
DH: A recent addition to the portfolio is Autodesk [Autodesk, Inc., of San Rafael, Calif.]. Autodesk’s computer-aided design software is used by architects, engineers and construction professionals to design and model buildings. There are a lot of inefficiencies in building projects. And Autodesk is at the forefront of improving the communication between all the different parties that have a hand in running a building project from start to finish. This makes the company very well positioned to benefit from the drive towards efficiency in the industry, and the increasing mandates for open standards to allow data to be shared across stakeholders. There’s also the tire company, Michelin [based in Clermont-Ferrand, France]. Since electric vehicles are significantly heavier, due to their batteries, and produce a lot more torque, tires wear out much quicker. And we like Michelin’s premium position in the tire market and higher-end technology. They’re able to charge more for their tires, especially the larger-diameter tires which are much more profitable and have a high loyalty rate among Michelin customers.
And finally, the bottom line on the market’s unique position.
DH: Be macro aware, but in the current market, it’s important to stay disciplined and long-term focused. Focusing on the news of the day and trying to react to that is not often a winning strategy. It’s incredibly hard to predict the timing of a recession. That’s not how our investment team spends its time and that’s not how we believe investors should spend their time. Instead, anticipate the inevitability of recessions by building portfolios with high-quality companies that have proven they can withstand times of adversity, they can gain market share when competitors are struggling, and they have pricing power. Periodic economic recessions are a necessary way to get rid of a lot of the built-up excesses created during expansionary periods. We of course don’t enjoy tough times in the economy. But, for this reason, it does make sense to embrace slowdowns.
Well, those are today’s Soundbites, brought to my Investment Executive and powered by Canada Life. Our thanks again to Dustin Haygood of Aristotle Capital Management.
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