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My wife constantly tells me that not everything is logical, but these markets, monetary and fiscal policies are purely insane.
Consumption, the Philly Fed index, and unemployment were generally positive. At the same time, the Empire State index and real estate are worse.
Everyone knows that one of the biggest accelerators of inflation is government spending…So the government passes another massive spending bill to “combat” inflation.
This has confused me. I am not alone, as many battle-hardened investors are perplexed by the US macroeconomic numbers.
After nearly two months of a bear market rally and negative news, this end of summer looks like the end of a positive rebound in the markets. (Notice the break through the R1 on the S&P 500 chart)
Bottom Line
Does this mean I am bullish? No, there is an increasing concern that we could be heading to another dip because of The Fed’s response to increasing inflation.
If you are confused about the direction of the market and economy, you are not alone.
This week, JPMorgan CEO Jamie Dimon told affluent customers on a conference call that there is a 10% probability of a “soft landing,” a 20%–30% possibility of a “mild recession,” a 20%–30% chance of a “harder recession,” and a further 20%–30% chance of “something worse” than a deep recession.
According to Dimon, the business was “bracing ourselves” for an economic hurricane in June. Major financial institutions appear to be divided; although some continue to predict that the United States will avoid a recession, others concede that a gentle landing is improbable.
The belief that the Federal Reserve will need to take additional action to prevent inflation is now one of the most prominent trends.
This week’s inflation rate is still very high at 9.18% YOY.
Even the Fed anticipates that interest rates must reach a “sufficiently restrictive” level to reduce inflation and remain there “for some time.” “Restrictive” means what?
In the past, raising interest rates to the level of the Consumer Price Index (CPI) was necessary to stem the flow of inflation.
The Fed, in my opinion, is keeping an eye on CPI and the unemployment rate to stop raising interest rates once it reaches at least 5 percent. Looking at the current response, the Fed has to raise rates a lot more (double?) to bring inflation down. This is very tricky given the high value of the dollar.
IMF Director Kristalina Georgieva hinted at it in a blog post, and the fund lowered its estimate of global GDP growth for 2022 and 2023 for the second time this year. It anticipates that growth will drop from 6.1 percent last year to 3.2 percent this year and to 2.9 percent the next year.
However, for some people, the situation is not terrible enough. “Next year is anticipated to be much worse, with the growth of only 2.9 percent, barely over the 2.5 percent growth level that the IMF has traditionally regarded as a worldwide recession. However, that forecast is predicated on the status quo.
More threats are emerging, including the potential for Russia to stop gas supply to Europe. According to the IMF, that would increase inflation even further and reduce this year’s global growth to approximately 2.6 percent, which is just shy of the hot zone.
We believe that the fact that some people find a downgrade that pushes present pressures to 2023 to be insufficiently grim is an example of what Ken Fisher, the founder and executive chairman of Fisher Investments, refers to as “the pessimism of disbelief.”
This sentiment feature assumes that all negative news is accurate and will only worsen and that any glimpse of hope is either transitory or about to turn into something terrible. Bull markets, in our opinion, are constructed on this intense flavor because, as Sir John Templeton once said, “Bull markets are founded on pessimism.”
Therefore, don’t simply predict more bad times in the future based on this prophecy. Instead, think about how it—and the negative responses to it—should help reality provide the kind of pleasant surprise that stocks usually appreciate by lowering expectations.
The release of updates on durable goods orders, home prices, PMI data, and the highly followed PCE price gauge next week’s economic announcements might also cause disruptions.
The consumer and technology industries will once more be flooded with earnings results, with Dollar Tree (NASDAQ: DLTR), Dollar General (NYSE: DG), Nvidia (NVDA), and Salesforce (CRM) among the leading names.
The Jackson Hole meeting at the end of August might be an additional adjusting factor for Mr. Market’s projections. Jerome Powell will use this chance to reiterate the significance of controlling inflationary expectations.
Understanding whether problems with the energy supply will result in a slowdown in activity in the second half of the year after resisting in the first depends on this anchoring. If this is the case, the recession, if it happens, could be delayed until 2023.
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Irving Wilkinson
Editor
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