The Final Thoughts section this week is worth your time. If you only have a few minutes, skip ahead. Prospects of cooling inflation powered a rally in stock prices last week despite growing recession concerns. The Dow Jones Industrial Average gained 5.39%, while the Standard & Poor’s 500 climbed 6.45%. The Nasdaq Composite index rose 7.49% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, edged 0.78% higher. STOCKS BOUNCE Declining energy and food prices and falling bond yields signaled a potentially improving inflation outlook, buoying investor sentiment. The rally in stocks was most powerful on the first and final trading days of a holiday-shortened week. Stocks turned a bit choppy mid-week as investors digested Fed Chair Jerome Powell’s Senate appearance but resumed their momentum on Thursday and rallied Friday as rate-hike expectations eased. Though the weekly gain was a welcome respite from the market’s downward trend, declining bond yields and falling food and energy prices can also be interpreted as signs of slowing economic growth, which may represent a headwind for corporate earnings in the months ahead. POWELL TESTIFIES Fed Chair Jerome Powell told members of the Senate Finance Committee that the Fed is committed to lowering inflation and moving quickly to do so. He conceded that a recession could result from the Fed’s inflation-fighting efforts and acknowledged that some of the forces driving inflation (e.g., supply chain, war) are out of the Fed’s control. Perhaps the most exciting part of his testimony was what he didn’t say, which was a definitive statement on future hikes. Instead, Powell told lawmakers that he “anticipate[s] that ongoing rate increases will be appropriate.” Before his testimony, the Fed published a new research paper that found a greater than 50% chance of recession in the next four quarters. THE WEEK AHEAD: KEY ECONOMIC DATA Monday: Durable Goods Orders. Tuesday: Consumer Confidence. Wednesday: Gross Domestic Product (Third Estimate for Q1). Thursday: Jobless Claims. Friday: Institute for Supply Management (ISM) Manufacturing Index. THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS Wednesday: General Mills, Inc. (GIS). Thursday: Micron Technology, Inc. (MU), Constellation Brands, Inc. (STZ), Walgreens Boots Alliance, Inc. (WBA). FINAL THOUGHTS There is a growing consensus, at least in the short-term, inflation is nearing its peak. Whether this is so will likely dictate market returns the second half of the year. The Fed has been raising rates and posturing all year long. Ironically, the posturing tends to be more powerful in the short-term than actually pushing rates up. After all, the stock market is forward looking. If it believes the Fed is going to push rates up, or down, it will discount or apply a premium to corporate earnings as it sees fit. Perception is reality and what one believes will happen can often become a self-fulfilling prophecy, unless they are proven wrong. The market has applied a significant discount to stock prices all year based on the assumption that the Fed is going to have to push rates higher in dramatic Paul Volcker early 1980's style. This is the market’s perception. It may turn out to be right or it may not. loses his job and that a depression is when you lose yours. It’s a joke, but it is indicative of how we as humans perceive situations. Let me remind you who determines “official” recessions in the United States. It is the National Bureau of Economic Research, not the Fed or CNBC. The NBER’s highly technical definition of a recession (taken directly from their website) is as follows: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” We will have a “recession” at some point. It doesn’t mean the economy or the markets will come unglued and Armageddon is at hand. If inflation is truly peaking and if corporate earnings come in halfway decent (as they are expected) then the Fed may not have to drive the economy into the dirt, something they’d rather not do. As I mentioned, there is a growing consensus inflation is nearing its peak. I didn’t say it had peaked, but nearing the peak. Anyway, this hypothesis is based on declining wholesale (not retail yet) prices of many commodities and the work higher borrowing costs is doing in the economy. In the past, the Consumer Price Index (CPI), the most widely recognized measure of inflation, has followed commodity prices. So, is inflation peaking? We will learn more in the coming months. See chart below.
number came in at 50 last week. The chart below still shows last month’s number at around 58 (which was still pretty low), so 50 is literally at the bottom of the graph. May of 1980 was the prior low at 51.7. For reference, the number only got down to 55.7 in the throes of 2008. Yes, I downloaded all the raw data and went through the spreadsheets to check the numbers. Why is this relevant? I mean, we know everyone already feels bad about the economy and markets. Well, extremes in consumer sentiment have been a fairly strong contrarian indicator as it relates to the S&P 500. See for yourself. Could it be different this time? Sure. a potential Fed pivot later in the year with interest rates. They’re not the only ones with this forecast. We’ve been hearing this from a few other analysts as well. The Fed, pivot? It wouldn’t be the first time. Market bottoms are a process and not a particular data point in time. However, the next data point the entire market will be looking to in July is the July 13th read on CPI.
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THIS WEEK'S UPDATE
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June 27, 2022
