Taking it slow

Stocks had a mixed close yesterday as inflation fears and potential for a recession fueled a battle between bulls and bears. Chairman Powell stuck to the script at a central banker’s confab keeping investors on edge about…everything.

No quarter given. There is simply nowhere to hide and perhaps rest in today’s market environment. Today marks the last trading day of the month, the quarter, and the half. I won’t use the first word that comes to my mind to describe it because I want to keep my “G” rating, so I will let you fill in your favorite descriptive phrase, just don’t say it in front of the kids. Back to the script. If this morning’s futures reading portends today’s regular session, this first half-year performance would mark the worst since 1970. I know that I have mentioned this before, but it is difficult to shake the discomfort. The problem is that it is unclear when the discomfort will end.

A lot of the pain can be traced back to the Fed. To be clear, it is not the Fed’s fault that the markets are trading lower, but the Central Bank did have a hand in causing inflation, everyone’s nemesis these days. Before we take up pitchforks and torches, it is important to note that the Fed’s low rate policy which contributed to today’s recession was a result of its key role in getting us out of the economic rout caused by the pandemic. What was good for us in 2020 and 2021 is now bad for us in 2022. We are now relying on the Fed to cut back inflation, which is not as easy as it sounds. The Fed’s principal tool for inflation fighting is akin to a big sledgehammer: rate hikes. Not just any rate hikes, but big rate hikes, as in the kind we have not seen in decades. Alas, here we are at the midpoint of the year, and we know all this nonsense. We are expecting inflation to persist, we know that interest rates are going higher yet, and we are already adjusting our spending habits. The markets are also expecting inflation to continue, several more oversized rate hikes, and a slowdown in consumption. The first two are quite clear, but the last one, consumption, has the market stymied at current. It is unclear if consumers will pull back enough to cause the economy to fall into a recession. That is certainly one way to tackle inflation, but it is undoubtedly not the desired path.

Just last week, Chairman Powell acknowledged that a recession was a possibility resulting from the Fed’s inflation fighting activities. Markets scrambled to make sense of the heightened alert buy ultimately choosing to view it as positive, as a weakened economy would likely cause the FOMC to ease up its rate-hiking. Just yesterday at an ECB forum in Portugal, Jerome Powell spoke up once again. Though the message was the same, some of the wording had changed. He was clear the Central Bank was seeking to “slow” economic growth down. He further relayed that the Fed “hoped” that its hiking would not cause a recession. My regular readers know that I often espouse that “hope is not a strategy.” For some, that admission may be worrisome. He further noted that the Fed was acutely focused on fighting inflation. This oft-repeated line is designed to send a message to consumers: “stop spending!” The anticipation is that consumers will adjust their spending without the Fed having to wield its big sledgehammer. Powell also held that the Fed still believed that the US economy is in good shape and that it could withstand the tighter policy. The labor market is still quite strong with unfilled job openings near all-time highs.

Yesterday, we got a final revision to Q1 GDP growth and the earlier estimates were unexpectedly revised down to -1.6% from -1.5%. In about a month we will get the first estimate of Q2 GDP and all eyes will be peeled to the screen. As of today, median estimates for Q2 are for a +3.0% growth. Looking down the list of estimates we note a range from +5.2% at the high end and just +0.1% at the low end. None of these prominent economists are predicting a decline… yet. Those same economists currently give a 33% probability of a recession in the year ahead. Only 9 of the 48 survey respondents are predicting a greater than 50% chance of a recession. How is that for cold comfort? Well, before I am accused of being overly dark, I want to remind you that in the wake of that bad 1^st half-year in 1970, the S&P500 rallied by some +25% through yearend…and that all happened during a recession. The 2 years that followed saw returns of +10.8% and +15.6%. Since that tough year of 1970, the S&P500 only posted 12 losing years…in 50 years. Oh, and the S&P gained +4,044% since the close of the year with an annual equivalent return of +10.6%. We don’t know when the discomfort will end, but we know that it will.

YESTERDAY’S MARKETS

Stocks initially fell but ultimately recovered for a mixed close as traders simply could not shake jitters about the economy. The S&P500 slipped by -0.07%, the Dow Jones Industrial Average gained +0.27%, the Nasdaq Composite Index fell by -0.03%, and the Russell 2000 Index dropped by -1.12%. Bonds gained ground and 10-year Treasury Note Yields fell by -9 basis points to 3.08%. Cryptos lost -2.10% and Bitcoin slipped by -0.25%.

NXT UP

• Personal Income (May) is expected to have grown by +0.5% after gaining +0.4% in April.
• Personal Spending (May) may have slowed to +0.4% from +0.9%. Good for inflation, bad for economic growth.
• PCE Deflator (May) is expected to reveal a +6.4% change over last year, slightly higher than April’s growth figure.
• Initial Jobless Claims (June 25) is expected to come in at 229k, same as last week.