Economic Monitor: It's Wild Out There
BY: Mark Drachenberg
Moreso than others in recent memory (with the notable exception of 2020), this year has been hard to figure out – all the twists, turns, ups, and downs have left many investors yearning for direction. Borrowing an analogy from the world of entertainment, it’s been more Animal House (i.e., chaotic, shambolic) than Animal Planet (i.e., relaxed, broadly appealing).
Staying with the animal theme, the markets and their players are no strangers to being painted as bulls and bears, but what about hawks, doves, rabbits, tortoises, snails, chickens, and more? Where are you, Jack Hanna, when we need someone to make sense of these economic animal adventures?
Let’s enter the zoo and attempt to make sense of the market monkeyshines…
Financial Markets
That sigh of relief we all felt after the markets rallied in July turned to a groan in August. The markets struggled to maintain positive momentum throughout the month, particularly after Federal Reserve Chairman Jerome Powell’s much-anticipated keynote speech at the Fed’s Jackson Hole Economic Symposium.
Powell’s hawkish (i.e., tough on inflation and tightening monetary conditions) comments felt diametrically opposed to his more dovish (i.e., easier on inflation and monetary conditions) comments in July. Digging deeper, though, his comments didn’t differ much from those expressed in the minutes from July’s Fed meeting, and probably shouldn’t have come as that big of a surprise. Unfortunately, his tone did surprise many, and the bulls ceded ground to the bears to close out the month.
August also saw equity markets give back between 3% and 5%, depending on the index, and the fixed-income markets retreated almost 3% as well. Inflation steadied a bit and unemployment inched up slightly. The rabbits (i.e., those who rapidly trade stocks seeking large, short-term gains) were certainly out in July, as they have been at times over the past year and a half, causing many of them to become pigs (i.e., those who make large gains on initial investments and then become overly greedy).
Many tortoises (i.e., long-term investors, typically in indexes) have feared for their returns and may be consequently turning into chickens (i.e., investors who get unnerved when the markets fall) or snails (i.e., very cautious investors who are comfortable with minimal returns utilizing annuities or bank savings products) as this extended period of volatility continues.
The markets and the economy are both unsteady, but periods like this can also be ones of great opportunity.
Economy
All the discussion surrounding whether the country is in a recession seems to have died down somewhat, likely because we’ve moved beyond the end of the second quarter, more than anything else. Much of the data is relatively the same as it has been for the past few months, and recent news has been dominated by other political events.
As we mentioned last month, from an “official” standpoint, we are not in a recession…yet. The hard part, though, is that parts of the economy remain undeniably troublesome (e.g., inflation, interest rates, home buying and construction), while others are encouraging (e.g., unemployment, wages, travel). Further complicating things is that many of the metrics feel good for some (e.g., rising prices can help businesses, higher interest rates help savers) and bad for others (e.g., rapidly rising wages can hurt small businesses). The struggle for economists is determining which metrics to give more credence to, and for how long. Therefore, estimates for when a recession may hit range from “we’re there now” (very few), to “we’ll be there later this year or early next” (some), to “we won’t enter a recession until the second half of 2023” (some). All estimates, of course, are subject to change as the data changes, and the data seems to be changing all the time.
- Gross Domestic Product (GDP): GDP fell at an annualized rate of 0.6% in the second quarter, after falling 1.6% in the first quarter. This number will likely be revised but is better than the initial estimate that showed GDP dropping 0.9% in the quarter. Full-year estimates have been all over the map but are currently running in the positive 1%-or-so range.
- Inflation: Inflation moderated slightly, to 8.5%, and everyone got excited. Unfortunately, that’s not really a dramatic move, though it is a step in the right direction. The Fed, however, wants inflation to come down further and faster (ultimately back to 2%) before it stops tightening, and this has created fear in the markets that the Fed will not be able to engineer a soft landing. Oil/gas prices had been coming down, but there appears to be agreement in OPEC and others to not increase the supply of oil, and that’s sent prices higher. With winter approaching, this is not good news for the economy. All eyes are on this reading each month, as it will, to a large extent, dictate how the markets and economy fare.
- Unemployment: Somewhat steady as she goes, as jobs are still plentiful and wages have continued to rise. There’s still a long way to go to get back to pre-Covid employment levels, but progress is being made.
Fed Watch
The Fed remains front and center in the fight against inflation; it raised the fed funds rate by 75 basis points again in July, to 2.25%–2.50%. Expectations were that it would continue to ramp the rate up to 3.00%–3.50% by the end of this year or early next, before taking a break. After Jackson Hole, those estimates have now increased somewhat to the 3.50%–4.00% range or even higher. Expectations were growing that the Fed would be forced to cut rates sometime in 2023, but those expectations have been tabled for the time being. The Fed has been giving the markets and the overall populace a warning that the economy will face some pain as it works to drive inflation down. This has spooked the markets, but it's really nothing new.
Outlook/Summary
We’ve said it before and will say it again: It never pays to time the markets, but it’s worthwhile to pay attention to history and to what others may be doing. This may be especially true for investors who watch whales (i.e., large institutional investors that may move the markets with their oversized trades). Whales, yes; sharks (i.e., those that may push up the prices of stocks to make a quick gain and then dump the stock, catching unwary investors off-guard – somewhat like what we have seen with the meme stocks), no.
We don’t want to be like sheep (i.e., herd investors that blindly follow suggestions from others), but we do want to continue monitoring the Fed, the economy, and other news, so that we can make the most informed decisions possible.
To discuss your portfolio, please reach out to me or anyone in our Wealth Management department today. We look forward to speaking with you soon!