Stocks fell yesterday as Treasury yields climbed for a second straight session. Crude prices continued their climb in response to lower inventories and a supply cut extension expected from OPEC.
Have you heard? Well, have you? Of course, you have, there is a recession coming. Hold on, hold on, there is always a recession coming, it is just a matter of when and how deep. Getting those two factors right is the trick, and very few economists seem to be able to get it right until it’s too late… like the week before it actually happens. Think of it like watching a bunch of cars speeding, out of control around a racetrack, and you think, “someone is bound to crash at some point.” That thought is not unfounded and probably correct. You follow that thought with, “I hope that it is just a minor one without anything but egos getting injured.” In steps a brilliant analyst who watches keenly as car #7 spins off the track, into the gravel, and heads toward a pile of tires and says, “I predict that car #7 will crash.” Brilliant, and well done!
Yeah, that’s, kind-of how it’s done, and yes, indeed, the economy will slow down at some point, but exactly when and by how much is anyone’s guess, and apparently, making that guess is getting to be more of a challenge. According to a large list of experts from well-known banks and institutions, all tracked by my friends at Bloomberg, predict, on average, that there is a 60% likelihood of a recession in the next year. If you are a regular reader, you should not be surprised about this, because I refer to this number often. The Fed is after all aggressively throttling back on the economy. They have hiked rates, they are selling bonds, and they continue to threaten growth with future rate hikes. Now, we know that, eventually, all of that will take its toll on growth. The problem is that it just hasn’t happened yet.
Inflation has slowed, which is the reason for all this fuss, however, it is still too high. Unemployment is up by a notch, which should please Fed officials, but it is still lower than they would like. And then there is consumption… CONSUMPTION. When I jabbed a few days back about the Barbie Movie, Taylor Swift, and Beyoncé, it was not a joke. I have seen more than one, but less than five , reports on exactly how much spending on those three things alone will add to the US GDP growth for the 3rd quarter. All that spending is a result of strong consumer sentiment which remains buoyant despite the Fed’s best efforts to quash it. Now, granted, it is not at 2019 levels, but it is certainly higher than 2020 levels, and indeed, much higher than it was during and in the years that followed the Great Recession. Folks are spending money because they are confident. Confident in their employment, the economy, the markets, etc.
Later this month, the FOMC will hold a policy meeting and decide on whether or not to continue to hike interest rates. While the Fed is widely expected to keep rates constant, many will be looking for clues of when the policy makers will start cutting interest rates. Of course, Fed members will not simply tell you if and when, but there may be some hidden signs in its quarterly projections which will be released at the meeting. The Atlanta Fed publishes a growth tracker which attempts to forecast GDP, quantitatively, based on more current conditions, and it has been upping its forecast recently. In fact, the tracker predicts a +5.6% annualized quarterly GDP growth for Q3. Not only can that not be described as declining, but rather, BOOMING. Now, it is important to note that the gauge is just a prediction and is not known to be accurate, but we can derive some information from it… there has to be some truth in it. The tracker factors in a number of indicators that economists also use in their predictions. It is therefore realistic to assume that Fed members will possibly increase their economic growth forecasts later this month. That is good news, if you are afraid of a pending recession. Unfortunately, that is bad news if you would like to see rates come down soon. There is a good chance that the Fed will be forced to push out its rate cut schedule. But don’t worry, rates WILL COME DOWN… eventually… we just don’t know when and by how much.
WHAT’S SHAKIN’
Southwest Airlines Inc (LUV) shares are lower by -4.16% in the premarket after the company warned that its projected fuel costs are rising quickly. United has warned of similar increases. While the company has not revised its guidance, many analysts are concerned that downward revisions are coming as those higher fuel costs bite into already lower summer fares. Southwest reports earnings in late October. Dividend yield: 2.33%. Potential average analyst target upside: +15.5%.
ResMed Inc (RMD) shares are higher by +1.40% after Needham upgraded the stock to a BUY and raised its price target stating that the recent price declines make the stock attractive at these levels. Dividend yield: 1.24%. Potential average analyst target upside: +49.7%.
YESTERDAY’S MARKETS
NEXT UP