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Fidelity executive Denise Chisholm

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What if the Recession We've Been Waiting for Already Happened?

By Jane Wollman Rusoff

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Will a recession hit the U.S. in the next 12 months? Banks are worried, while Treasury Secretary Janet Yellen now sees less risk of such occurrence.

Amid this long-running controversy, Fidelity Investments’ Denise Chisholm, director of quantitative market strategy argues, in an interview with ThinkAdvisor, “Signs suggest we may have already had a fairly bad [recession] … with a real hard landing.”

That’s what patterns in stocks, factors and the broad market backdrop tell her. 

Focusing on historical analysis — versus fundamental analysis — Chisholm looks for consistent patterns in the historical data that are predictive of what’s to come. These patterns can be used as the basis for investing in sectors, factors and the markets for the next year, she says.

At Fidelity for more than two decades, and in her present post since 2021, Chisholm is a 2022 Think Advisor LUMINARIES award winner for Thought Leadership and Education.

Forever challenging the status quo and rejecting the conventional wisdom, Chisholm looks for “strong probability to bet on,” as she has framed it in a Think Advisor “Conversation with a LUMINARY” podcast.

In her dual role, she informs Fidelity portfolio managers and clients of the historical probability associated with data patterns — exhibiting valuation consistency — that she discerns and then presents her views on Fidelity webcasts and webinars.

In a recent interview, Chisholm, speaking by phone from Fidelity headquarters in Boston, forecasts that cyclical sectors, especially consumer discretionary, are likely to provide investment opportunities in Q3. 

Before rising to her current position, Chisholm was an equity analyst, portfolio manager and sector strategist. For four years, she was director of independent research at Ameriprise Financial.

There’s no question that she’s a proud — and extroverted — quant who regularly interfaces with portfolio managers and clients. But, she maintains, “I am a data geek at heart. I’m more comfortable processing data than explaining things.”

Here are excerpts from our interview.

THINKADVISOR: Please describe your approach to equity research.

DENISE CHISHOLM: It’s dramatically different from most of our fundamental analysts. Mine is much more data-driven. It attempts to look more at sectors, factors and the market backdrop overall.

What’s your process?

It’s, effectively, a pattern-recognition exercise. I’m trying to find a consistent pattern in historical data that has been predictive.

That can inform our views about what might happen in overall markets over the course of the next year.

Have fears of a recession abated?

Recession fears will potentially remain.

But in a recent report, you write that there’s “the possibility that a recession may have happened already.” Please explain.

The National Bureau of Economic Research, which calls a recession, hasn’t officially called one. But signs suggest that we may have already had a fairly bad one.

We’re off-cycle this cycle. What I mean is that real average hourly earnings were positive in 2020 and negative in 2022 without the recession. So, in some ways, the recession has been off-cycle.

You write that “one of the most consistent indications [of a recession] has been a contraction in real wages (adjusted for inflation).

“That happened in every recession since 1962 except [during] the 2020 COVID shutdown. That was the only recession where we’ve seen real wages grow and accelerate,” you say.

That was quite different, wasn’t it?

Very different. What we saw in the peak-to-trough correction in 2022 is very correlated to that contraction in real wage growth. And it looked a lot like a real hard landing.

So you’re suggesting that “real wages declined throughout 2022 … as inflation outpaced wage growth.” Please elaborate.

Real wage growth may have bottomed last fall. A rebound could provide a tailwind for the economy.

What else do you see happening right now that’s significant for investors?

There’s a narrative that the market is narrow. The knee-jerk reaction is to suspect that that’s a vulnerable position.

But what you find is the opposite pattern historically: the more narrow the market, the more likely the market is to advance over the next 12 months.

So a lot of the data can unpack whether or not narrowness in the market — whether macro or otherwise — is predictive.

What’s another example in which you saw a predictive pattern and the event or conditions occurred?

There was a clear narrative around the concern about a recession. Given the historical likelihood that defensive sectors, like consumer staples, utilities and health care, tend to outperform even after a recession hits, maybe investors were thinking that perhaps these equities might be the way to go.

How did that turn out?

What was different was that in the patterns we saw, defensive equities had already outperformed more than they had the year going into a recession, or more than is typically seen during prior recessions. And they were about 25% more expensive.

There was more downside risk based on the starting valuations than potential upside risk based on recessions, mostly because recession timing is so variable.

What does that tell us about your research methodology?

You can always pick data to use historically, but one of the ways I use data is to determine where the patterns have been consistent historically, meaning that valuation consistently matters.

What do you see upcoming for the market in Q3?

In some ways, more of what we’ve seen over the last quarter, which is the market potentially climbing a wall of worry, as recession fears further abate.

Leadership will be more in the cyclical sectors or the economically sensitive sectors, like technology and consumer discretionary, where you’re seeing valuation support, meaning that we’re in the bottom quartile relative to price-to-book ratios going back in history.

The cheaper the stocks are, relative to the rest of the market, the more likely they are to outperform.

What should investors keep in mind specifically with regard to your forecast?

Data point No. 1 on consumer discretionary is that there’s historical valuation support. Data point No. 2 goes back to that real wage growth. 

Because inflation has decelerated, real wage growth has accelerated. And that has been a significant tailwind for the sector.

So I have a positive outlook for the stock market and a continued focus on cyclical sectors, particularly consumer discretionary.

Do you think that inflation will start to rise again?

Inflation is likely to continue to decelerate.

Too bad food prices aren’t decelerating, it seems.

They are, just not very quickly.

Jane Wollman Rusoff

@jrusoff2

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