Quarterly Conversations – Strategic Thinking

AGW Principal & Co-Founder P.J. Gardner, CFA®, CFP®, discusses the strategy components of investing in a time when a recession is probable and the implications for investors. This conversation was recorded on August 7, 2023, and reflects information available at that time.

Audio Only

Highlights

• Trim passive investments and reinvest in active managers who are looking for well-run companies that are trading at attractive valuations.
• While a recession is likely, there are some factors that could prevent it from happening.
• The current market environment is unique and what has worked in the past may not work in the future.

Full Transcript

I think one of the most important things in investing is it’s very humbling. What you believe to be absolutely true may not happen or may not happen on the timeline that you would expect it to. So I think it’s always good to have a sense of humility and think about what am I missing.

I think the greater probability is that we are headed to a recession for reasons we’ve talked about. If there are a few things that I’d say, I would push against that potentially.

Number one is cash. There still is a lot of it. It’s hard to measure. So if you look at the money market, you saw a tremendous spike in the money market after Silicon Valley Bank, Signature Bank, and other bank failures. So it’s hard to tell how much sort of checking and savings account balances that would otherwise be sitting in banks are now all of a sudden showing up in the money market. Again, I think there’s a considerable amount of that. So it’s hard to just look at cash and say, “Well, gosh, it’s bullish because it’s high.” It is incredibly high, but to what degree is that, again just, checking and savings account balances relocated?

The other one is everybody seems, or at least the professional commentators, economists, strategists, and so forth, seem to be on this on the same side of the boat. Some are coming around to the idea that maybe there is the possibility of a soft landing. But usually, when everybody’s on one side of the boat, the opposite tends to occur. I feel like anybody who’s read a finance or economics textbook, has half a brain, and has experienced a full market cycle where Mr. Market has stayed manic or depressive for an extended period of time would know that we’re sort of set up for some potential trouble.

And then the last thing I’d say is we’ve been in this environment where you’ve had tremendous surprises in both monetary and fiscal policy. If we get in trouble, is there another policy measure taken, perhaps never before done, that then puts the punchbowl back using the party metaphor, and the party goes on? And I think that’s a real possibility.

I think, just in this melt-up scenario, we’ve always held the belief that you should have both passive and active investors. And again, passive is doing extraordinarily well because of a handful of companies.
We think a great idea is to trim that passive exposure and reinvest it into active managers who are looking for well-run companies that are, in many cases, self-financing because of their cash flow and trading at real attractive valuations, and those exist. Because what’s love today has worked. Past tense, what works going forward, we think, looks different.

AGW Capital Advisors is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a member of the AGW team, another qualified financial adviser, and/or tax professional before implementing any strategy discussed herein.