The markets and the economy still face a number of challenges from lingering inflation, ongoing Fed rate hikes, and geopolitical instability. This is playing out within a context of a stock market that has declined—recent gains the exception—even if it has already priced-in a lot of “bad news.”
Two big questions remain as to what’s ahead: Has inflation peaked? Is a recession looming?
Inflation outlook
Leading economic analysts are divided on the question of whether inflation has seen its highest point. June’s 9.1% shock was followed by lower CPI numbers in July (8.5%) and August (8.3%) leading many to believe we are on the downside.
Other factors suggesting inflation might have reached its highest level include progress on the easing of supply chains; lower demand for gas followed by decreases at the pump in some areas; additional consumer belt-tightening—which has also lowered demand for consumer goods; and a cooling off in the housing market driven mostly by rising mortgage rates.
Also on the “peaked” side, the strong dollar has been helping U.S. consumers buy exported goods. And enough time has passed since the initial consumer surge in the immediate post-COVID aftermath to suggest some further easing of consumer demand. Another good sign: 5-year inflation expectations have declined among leading CEOs, settling near 2.25%—closer to the Federal Reserve’s target.
But questions remain. Prices outside core CPI items, including groceries and heating fuel, have surged above the inflation rate. And among unknown factors at play are global pressures—including the ongoing Ukrainian war, slowdowns in China, and a new U.K. regime with a shaky start.
Two peripheral items which may also factor in are the upcoming midterm elections in the U.S.—which could impact domestic energy policies; and holiday sales, which are forecast to grow 4-6%—substantially down from last year’s 15% but still in the black. Lingering uncertainty has resulted in tumultuous markets, slower growth forecasts, belt-tightening, an economy showing signs of gradual cooling, and recession jitters. Memories of past slowdowns have cast a pall over Wall Street and Main Street.
Recession ahead?
The “R” word—recession—has continued to be tossed around in financial news stories and among analysts. Adjusted GDP numbers showed a 1.9% decline in the first quarter followed by a .6% decline in the second quarter. But many analysts are pushing aside the technical recession definition of two consecutive quarters of negative GDP and looking at other indicators.
Job growth has remained strong and stands well above ten million available openings despite a dip for August. Second quarter corporate earnings were strong and so was sentiment among corporate executives in industrial companies.
These factors seem to defy the other definition of a recession: a decline in overall business activity. Retail sales have also not experienced the full effect of any consumer cutbacks and the upcoming holiday season may show shoppers to be resilient.
But if there’s no agreement on whether we’re actually in a recession, many voices are warning that one may be looming in the coming year. Their main concern is the aggressive stance by the Federal Reserve and its pledge to continue raising interest rates to slow the economy down and stem inflation.
Many did not expect the Fed to follow its historic rate hike of .75% in July with another in September, but that’s what happened, with Chairman Jerome Powell saying there would be “some pain” ahead and seemingly committed to future aggressive action.
That hike, along with inflation numbers, led to deep market sell-offs in September which put the S&P index into Bear market territory. But then stocks rallied strongly the first two trading days of October leading analysts to wonder if we were experiencing a “Bear-market rally” or if the market had already begun to price in future Fed action. Since October is also notorious for stock volatility, we’ll have to wait and see.
No easy decisions
It’s natural for investors to feel prompted to act when deep downturns erase previous gains and most of the economic news is tainted by gloom and doom. That’s when it helps to get perspective—especially the historic context of past big market declines and their ability to bounce back.
It’s been a proven losing strategy to try to time when you should be in the market or out of it. Many investors who attempt to do this usually end up losing more than if they had just sat still and done nothing.
It’s helpful to stay in contact with your financial advisor during these times and ask for a review to see how exposed you may be to risk. And, of course, discuss your concerns. But it pays to take a page once again from the Oracle of Omaha and simply wait out the storm.
“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people,” according to Warren Buffet.
In other words: Resist making moves in the heat of the moment when times turn challenging.
Our advisors are ready and available to review your situation and offer perspective in light of your own financial goals. Please let us know how we can help ease any concerns you have. www.leskofinancial.com