Elon Musk Has A “Super Bad Feeling” About The Economy. Here’s Why You Shouldn’t.

Elon Musk Has A “Super Bad Feeling” About The Economy. Here’s Why You Shouldn’t.
Stéphane Renevier, CFA

over 1 year ago4 mins

  • Elon Musk has joined a choir of CEOs – including JPMorgan’s Jamie Dimon – in sounding a dreary tone about the economy.

  • There are many reasons why you should not take that warning sign lightly: Elon and Jamie have only recently turned bearish, these are big firms in key sectors, and gloom tends to beget more gloom.

  • Since downside risks more than offset the potential upside for stocks, investors should remain defensive and wait for better opportunities.

Elon Musk has joined a choir of CEOs – including JPMorgan’s Jamie Dimon – in sounding a dreary tone about the economy.

There are many reasons why you should not take that warning sign lightly: Elon and Jamie have only recently turned bearish, these are big firms in key sectors, and gloom tends to beget more gloom.

Since downside risks more than offset the potential upside for stocks, investors should remain defensive and wait for better opportunities.

Mentioned in story

Last week, Elon Musk told top Tesla executives he had a “super bad feeling” about the global economy. And he’s not the only high-profile CEO to forecast gloom and doom: JPMorgan Chase’s Jamie Dimon warned investors to brace for a “hurricane” too. Here’s why you should be worried, and why – if you make some smart choices with your portfolio – you shouldn’t be.

Why should you be worried?

Musk and Dimon used to be optimistic.

Musk was until recently very bullish about Tesla’s prospects, with demand still strong for its luxury electric vehicles, and about global markets, as his $44 billion bid to buy Twitter illustrated. Dimon, meanwhile, until recently saw only “storm clouds” that he said could soon dissipate.

While headlines from such high-profile leaders should always be taken with a grain of salt – there can be a broader agenda at play – such a dramatic shift in sentiment should be taken as a warning sign.

It’s not just Elon and Jamie…

Musk and Dimon have made headlines, but they’re joining the growing chorus of corporate leaders who are warning about a deteriorating business outlook. And it’s not all blah-blah: recent earnings from economic stalwarts like Walmart to innovative firms like crypto exchange Coinbase have shown that profits are already being tested by higher interest rates and inflation. Overall, the trend is clear: corporate America is bracing for tougher times ahead.

Tesla and JPMorgan are big firms in key sectors.

Musk and Dimon manage two of the biggest businesses in the world’s most important economy. So when they turn more cautious, we’re talking about the potential for thousands of workers losing their jobs – and about huge implications for their global business partners, suppliers, and clients. What’s more, the impact is not just economic: Tesla’s been an investors’ favorite for a long time, and JPMorgan, the biggest bank in the world’s biggest economy, has been seen as a rare haven as rates rise.

If these companies’ outlooks deteriorate further, the implications are likely to be felt not just in the economy, but also in financial markets.

Both companies are bellwethers for the economy.

Auto sales and the flow of global credit are both reliable indicators of the health of an economy. When new car sales slow significantly, it often indicates that consumers are tightening their belts in anticipation of a recession. When global credit slows, it often indicates that banks are becoming concerned that companies and individuals may struggle to repay loans.

And while there may be other factors at play for these two companies – Tesla’s challenges may have something to do with the current shortages in key components, for example – neither company is alone in their industries in issuing warnings. And that’s a clear warning sign that the outlook remains dreary in the near-term.

Gloom leads to more gloom.

Periodically, markets go through sharp and prolonged downturns, and "negative feedback loops" can be part of the reason. It's what happens when companies become more cautious about their outlook, and their caution turns investor sentiment more negative. The effect sends stock and corporate bonds prices lower, which increases the cost of borrowing for companies, and that, in turn, impacts the outlook for these companies and leads management to become even more cautious.

This feedback loop between economic fundamentals and investor sentiment – which investing icon George Soros dubs “reflexivity” – can quickly turn into a negative spiral, stopping only when prices have fallen significantly.

This wasn’t the usual tweet storm.

Let’s be honest, this wasn’t the usual provocative tweet from @elonmusk. If it were, you could just as well ignore it. His note to executives, and Dimon’s warning to investors, were more than that. Together they add to the drumbeat of warnings from corporate leaders who are taking difficult actions – cutting their workforce or rescinding recently made job offers – to protect themselves against a deteriorating growth environment.

And that should worry you. The main reason why the stock market hasn’t sold off more significantly is because investors still expect companies to be able to weather a more challenging period. Musk’s note to executives – calling for job cuts and a global pause in hiring – suggests that won’t be easy.

So why shouldn’t you be worried?

There are plenty of reasons to be nervous, sure, but there are things you can do to make sure you’re protected and open to opportunity as and when it appears in this challenging market.

Make sure your portfolio is diversified enough: don’t hold just stocks, but also Treasury bonds, gold, commodities, and even the US dollar if you want a short-term hedge against all assets falling at the same time. Go defensive too: hold high-quality stocks in hard-to-live-without sectors like healthcare, utilities, and consumer staples. And if you want to make some serious money, you may do well holding some cash you can deploy if (when) we see some real capitulation in the market. Because it’s only then that going full-guns-blazing will maximize your rewards.

And if, in the meantime, you can’t resist the temptation to add some risk to your portfolio, look to assets that have already sold off a lot and arguably present more attractive risk-reward levels, like Chinese stocks or even disruptive tech stocks.

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