The Uncertainty of Forecasting the Economy: A Lesson from the Philadelphia Eagles

At the beginning of the NFL season, not many predicted that the Philadelphia Eagles would be in the Super Bowl this year. But, they had a fantastic season and are favored over the Kansas City Chiefs.

Predicting this economy is equally hard. Anyone who thinks they know exactly how things will turn out isn’t being honest. COVID policies—lockdowns, massive borrowing, and money printing to pay people not to work—have NEVER been tried before. So, what happens is still up in the air.

It seems like just yesterday the Federal Reserve Bank of Philadelphia was trying to convince people that job growth was non-existent in the second quarter of 2022. So it must have come as a shock to those who believed that nonsense. Because in January of this year, with all the Fed rate hikes, jobs data, and hours-worked, everything exploded to the upside. Non-farm payrolls rose by 517,000 jobs, while revisions to prior months added an additional 71,000.

Difficulty of Forecasting in Today’s Economy

Not one economic group came even remotely close to getting this number right. And it was especially surprising after seeing retail sales fall in December.

The difficulty of forecasting in this environment is absolutely astounding. On the one hand, the M2 measure of money has contracted over the last year (the first time in more than sixty years), after growing over 40 percent in a two-year span.

Some of you may know the name Milton Friedman. And in economics, M2 is the supply of money, and there has been no M2 growth for almost one year.

Now, using M2 being zero for almost one year, and Milton Friedman’s lag of 6-9 months, we should be seeing the economy begin to slow, which is what retail sales, industrial production, housing, and retail auto sales have been pointing to. And so far, with half of the S&P 500 companies having reported earnings, profits are down 3.1 percent from a year ago.

The economy is still absorbing the money printed during the pandemic. Inflation has not been eradicated, the Fed is highly unlikely to loosen policy anytime soon, and earnings are likely to fall as all the stimulus wears off. That’s not a recipe for a simple forecast. Like the Super Bowl, until the game is played no one knows exactly what will happen.

The good news is that our economy and the stock market are two different things—apples and oranges. I believe the most important item to keep our eye on are earnings. Many companies have been tightening their balance sheets and cutting unnecessary expenses, so hopefully that will help earnings reports as we move throughout the year. There is a lot of cash on the sidelines and hopefully we will continue to see some of that cash come back into the market.

Earnings Reports and the Future of the Economy: What to Expect in Q1 to Q4 of 2023

Earnings reports come out every quarter for the previous quarter. Q1 is looking okay so far and Q2 will probably be a little worse, because of the 6-9 month lag when it comes to the slowdown in our economy we are starting to see.

According to Bloomberg—and I would lean toward their prediction—we would see Q3 and Q4 look better because companies are cleaning up their balance sheets and cutting unnecessary expenses. So that should play out in making earnings look better later in the year.

In this environment, a well-diversified portfolio will win out in the long-run. We will have a small update to our portfolios this week. You will see some emails come through from TD Ameritrade as we make some small tweaks. The portfolios have bounced back recently and are looking much better. We will be coming out with some updates regarding the Secure Act 2.0 and all of its changes, especially the new info regarding the changes in the RMD age.