34th Annual Crystal Ball Seminar

We are excited again to co-sponsor the 34th Annual Crystal Ball with the University of North Carolina at Asheville. This has been a long-standing tradition that we look forward to every year.

On May 3, economists David W. Berson and James F. Smith will make forecasts on the business and financial outlook for the coming year and will explore the implications of those predictions on a state, national, and international level.

To learn more about the speakers and the presentation, please visit the crystal ball website:



David W. Berson of Nationwide Insurance
James F. Smith of Parsec Financial

Lipinsky Hall Auditorium – UNC Asheville campus

Thursday, May 3, 2018

6:15 PM – Reception with light hors-d’oeuvres & refreshments
7:00 PM – Economic Outlook
7:30 PM – Financial Outlook
8:00 PM – Q&A

Admission is free, however, seating is limited. To register, contact UNC Asheville’s Economics Department at 828.251.6550 or email kmoore@unca.edu.

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Are We Heading Towards a Recession?

The stock market is considered one of several leading economic indicators. Since 1949 markets have turned lower on average seven months prior to recessions, with a median pullback of about 9%.  However, this includes a wide range of numbers and in six out of the last nine recessions stocks were actually positive for the preceding twelve month period. Recently, investors’ recession fears have jumped in light of increased market volatility. While these concerns are understandable, we prefer to take a broader view when gauging the health of the U.S. economy. Doing so suggests more factors are working in favor of the current expansion than against it, and we could have more room to run.

As of March 1st, the United States entered its 105th month of economic expansion – the third longest on record. If gross domestic product (GDP) remains positive through May, the current expansion will become the second longest in U.S. history. While subpar growth has helped extend the length of this economic cycle, it’s important to acknowledge that we are likely in the later innings of the expansion that started in 2009.

Despite its unusual length, our economy has several factors working in its favor. These include strong corporate earnings growth, a healthy consumer, and improving business spending. Corporate earnings have improved significantly following a decline in 2015 that was tied to lower oil prices and an appreciating U.S. dollar. Likewise, the recently passed tax law — which reduced the U.S. corporate tax rate from 35% to 21% — should provide a significant boost to corporate spending in the months and years ahead. In fact, we’ve already seen a pick-up in capital expenditures from businesses as they’ve been able to return more cash held abroad at lower tax levels.

Although business spending has been notably weak for most of this economic cycle, the consumer has been a major contributor to GDP growth since 2009 and remains healthy. Strong jobs growth and recent gains in wage growth should continue to support household spending. While markets are concerned that the recent gains in wage growth suggest inflation may be heating up, it’s important to remember that for the last nine years investors were more worried about deflation. We would suggest the recent increases in wage growth reflect a healthy development, one that indicates a return to more normal conditions.

To that point, U.S. inflation has been persistently below the Federal Reserve’s 2% target since the Financial Crisis.  With the recent uptick in wage growth, the Personal Consumption Expenditure Index (PCE) – what the Fed uses to track inflation – is now up only 1.7% on a year-over-year basis.  Contrary to investor concerns, this would not suggest an over-heating price environment but a return to healthy inflation levels. Gradually rising inflation will also allow the Federal Reserve Open Markets Committee (FOMC) to continue to normalize interest rates, which have been at unusually low levels. Higher yields will help support millions of retirees on fixed incomes, stabilize many pension funds, and most importantly give the FOMC wiggle room to lower rates when the next downturn occurs.

As the FOMC continues to raise rates this year, investors and economists will be closely monitoring the yield curve. The yield curve is a line that plots the interest rates of bonds with the same credit ratings but different maturities. During economic expansions, the yield curve is usually upward sloping as bonds with longer maturities typically have higher yields. However, since 1901 there have been seventeen inverted yield curves (when the yields on shorter maturity bonds exceed those on longer maturity bonds) that have persisted four months or longer, all of which have been followed by a recession. Thus, an inverted yield curve that stays inverted for at least four months has never produced a “false positive” recession reading. This stands in contrast with the stock market, which as the late Nobel laureate Paul Samuelson once said, “has accurately predicted 9 of the last 5 recessions”.

Towards the end of 2017 the yield curve began to flatten. This caused some investors to worry it would invert, indicating a recession was around the corner. Starting in late January stock market volatility and bond yields jumped, amplifying investors’ recession fears. Ironically, the stock market turbulence and higher interest rates helped push the yield curve higher. Although the recent market swings and decline in bond prices (resulting from higher yields) were unpleasant, they are helping to avoid an inverted yield curve – one of our most reliable recession predictors.

In short, we see more positives than negatives regarding the economy. At the same time, it’s evident that we are in the later innings of the current expansion and risks such as high corporate debt levels, rising interest rates, and above-average asset valuations could trigger the next recession. Accurately predicting when that will happen, however, is a difficult job for even the most astute economists and investors. Fortunately when looking at the prior nine recessions since 1957, stocks have declined just 1.5% on average and market returns one-, three-, and five-years following past recessions have been significantly positive. Granted, the stock market during any individual recession may be significantly negative, but in four out of the last nine recessions, stocks actually rose. These statistics support our belief in long-term investing and using market pullbacks as opportunities to add to positions at lower prices.

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Why Trying to Time the Market is a Losing Game

The U.S. stock market has returned 282% since bottoming in March 2009, following the Financial Crisis.  Since that time, the S&P 500 Index has delivered positive returns in seven out of the last eight years and appears poised to produce another gain in 2017.  While it’s true that valuation levels are above long-term historical averages, in this email we’ll explore why trying to time the market is a losing game.

As a client you may be concerned that higher stock valuation levels coupled with a long-running bull market could mean an imminent pullback.  If so, you’re not alone.  Many investors have noted that it’s been a while since we’ve had a major stock market correction (defined as a drop of 10% or more).  This makes sense given that historically, the stock market has averaged three pullbacks of about 5% per year, with one of those corrections typically turning into a 10% or greater decline.  While it has been twenty-two months since our last market correction, we’ve seen longer.  Since 1990, we’ve experienced three periods lasting longer than twenty-two months over which markets did not experience a 10% or greater pullback.  So although we’re not in uncharted territory, the historical record suggests we could be closer to a market decline than not.

Given the above facts, clients often ask why we don’t sell stocks and raise cash in order to avoid the next market correction.  It’s a fair question, but when examined more closely we find that it’s a very difficult strategy to implement successfully.

Research has shown that trying to time the market is a losing game.  One reason is that an investor has to accurately predict both when to get out of the market and when to get back in.  While it’s difficult enough to time an exit right, the odds of then correctly calling a market bottom are even lower.  Part of this relates to the nature of market declines.  Looking back to 1945, the average stock market correction has lasted just fourteen weeks.  This suggests that investors who correctly sell their stocks to cash may be sitting on the sidelines when equities surge higher, often without warning.  While moving into cash may avoid some near-term losses, it could come at the higher cost of not participating in significant market upside.

Another reason to avoid market timing relates to the nature of market returns.  History shows that since 1926, U.S. large cap stocks have delivered positive returns slightly more than two thirds of the time.  As a result, you’re much more likely to realize higher long-term gains by remaining fully invested in stocks and weathering some of the market’s admittedly unpleasant downturns.

At Parsec, instead of market timing, we recommend investors stay invested throughout market cycles.  While this can be difficult at times, investing in a well-diversified portfolio has been shown to help mitigate market volatility and provide a slightly smoother ride during market downturns.  This is because portfolios that incorporate a thoughtful mix of asset classes with different correlations can provide the same level of return for a lower level of risk than a concentrated or undiversified portfolio.  It also ensures that investors participate in market gains, which often materialize unexpectedly.

In addition to constructing well-diversified portfolios, we believe in setting and maintaining an appropriate asset allocation based on your financial objectives and risk tolerance.  We then rebalance your portfolio to its target weights on a regular basis.  This increases the odds that you sell high and buy low.

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