This post was originally published on TKer.co
Stocks fell slowly, with the S&P 500 down 0.3% last week. The index is up 6.2% year-to-date, 14% higher than its Oct. 12 closing low of 3,577.03 and 15% lower than its Jan. 3, 2022 closing high of 4,796.56.
“The bear market is over, but it’s not the great reflation,” Chris Harvey, head of equity strategy at Wells Fargo Securities, wrote On Monday. “We don’t see a bull market or a bear market, just a market.”
Harvey called it a “one market only” market and said he expects “some softening but no sharp short-term reversal.”
In fact, we’re hearing less from those who previously forecast a major sell-off in stock markets earlier in the year.
And while Harvey’s characterization of the stock market is somewhat ambiguous, the way many view the economy is not paradoxical.
An economy so good it’s bad 🙃
In last Sunday’s TKer, I discussed how the bearish stance on the economy turned bullish on the back of strong economic data, noting that “it could be a few more weeks of resilient economic data before more economists officially update their forecasts.” revise above”.
Upgrade to paid
Well, those revisions are already coming in. After Wednesday’s strong retail sales report, JP Morgan, Bank of AmericaAnd Deutsche Bank were among the companies to join Goldman Sachs to revise near-term GDP forecasts or postpone expectations of a recession.
Retail sales rose 3.0% in January to a record $697 billion, according to Census Bureau data. This was the biggest gain since March 2021, and it was much stronger than the 2.0% increase economists were expecting.
Goldman Sachs Mentions of a “recession” in calls for quarterly earnings have plummeted, according to a study released Tuesday.
(Source: Goldman Sachs)
According to the Bank of America Global fund manager survey published on Wednesday, “Recession odds peaked at 77% on November 22 and have since fallen to 24% this month (down 27 ppt MoM), the lowest level since June 22.”
(Source: Bank of America)
In fact, attitudes toward economic growth have shifted upwards.
To be fair, it’s difficult to quantify exactly what the economy will do in the near future. But the confluence of data — including strong consumer finances and resilient labor demand — suggests there is a bias to the upside. Read for more: 9 reasons to be optimistic about the economy and markets 💪
Unfortunately, many economists aren’t exactly thrilled, as it jeopardizes ongoing inflationary efforts.
Here’s the problem with all this 🤦🏻♂️
The notion that good news for the economy is bad news for inflation was renewed on the back of very strong jobs and consumer spending data.
“My new perspective is good news is good news, great news is bad news,” says Conor Sen, columnist for Bloomberg Opinion. tweeted last week.
The upward revisions of many economists to their economic growth forecasts have been accompanied by restrictive revisions to their expectations for the trajectory of monetary policy: Deutsche Bank, UBS, Bank of AmericaAnd Goldman Sachs were among companies to warn that the Fed would hike rates more than previously expected as it escalates its fight to bring down inflation.
And a restrictive monetary policy means headwinds for the economy and the financial markets.
Upgrade to paid
What to see 👀
The big question is to what extent the strength of the economy will break the current downward trend in inflation. In other words, will we learn that the Fed’s claim that the disinflationary process had begun was premature?
It doesn’t help that last week’s CPI and PPI reports were a little hotter than some were expecting.
But a month’s worth of data never confirms or denies a trend. We may still be on track to achieve the Goldilocks scenario, where inflation falls without the economy slipping into recession.
We have to wait.
That is interesting! 💡
From a new NBER paper entitled “Algorithmic Writing Assistance on Jobseekers’ Resumes Increases Hires”:
There is a strong correlation between the quality of resume writing for entry-level applicants and whether those applicants are ultimately hired. We show that this association is at least partially causal: a field experiment in an online job market was conducted with nearly half a million job seekers, in which a treated group received algorithmic writing assistance. Treated job seekers experienced an 8% higher likelihood of being hired. Contrary to fears that the support takes away a valuable signal, we find no evidence that employers were less satisfied…
Review of macro cross currents 🔀
There were a few notable data points from the past week to consider:
🛍️ Consumers spend. Retail sales rose 3.0% in January to a record $697 billion, according to Census Bureau data Wednesday. See above for more information on retail sales.
(Source: JPMorgan)
🎈 Inflation continues to cool. The Consumer Price Index (CPI) rose 6.4% yoy in January, up from 6.5% in December.
annualizes the three-month trend In the monthly numbers, the CPI is up 3.5% and the core CPI is up 4.6%.
tends to be lower, they remain above the US Federal Reserve’s target rate of 2%. For more information on the impact of cooling inflation see: The bullish “Goldilocks” soft landing scenario everyone wants 😀.
👍 Inflation expectations fading. From the New York Fed’s January Survey of Consumer Sentiment: “Mean inflation expectations were flat over the year horizon, declined 0.3 percentage point over the three-year horizon, and rose 0.1 percentage point over the five-year horizon. Horizon at 5.0%, 2.7% and 2.5%, respectively.”
(Source: New York Fed)
👎 Debt defaults continue to normalize. From the New York Fed: “The proportion of debt that is new to defaulting has increased across almost all debt types, after two years of historically low levels of defaulting. The transition rates into prepayment for credit cards and auto loans rose 0.6 and 0.4 percentage points, respectively, after similarly large gains in the second and third quarters. Transition rates for mortgage defaults rose 0.15 percentage points. Those for student loans have remained unchanged as the federal pause on repayments remains in place.” Read more: Debt ratios are normalizing 💳.
(Source: New York Fed)
💼 Unemployment claims remain low. Initial jobless claims fell to 194k in the week ended February 11 from 195k the week before. While the number has risen from its six-decade low of 166,000 in March 2022, it remains close to levels seen during periods of economic recovery.
All together 🤔
We are getting a lot of indications that we could get the bullish “Goldilocks” soft landing scenario, where inflation cools to manageable levels without the economy having to slide into recession.
And the Federal Reserve recently adopted a less hawkish tone, acknowledging on February 1 that “for the first time the disinflationary process has begun.”
Nevertheless, inflation still needs to fall further before the Fed can get comfortable with the price level. So we should expect the central bank to tighten further, which means we should be prepared for tighter financial conditions (e.g. higher interest rates, tighter lending standards and lower stock valuations). All of this means that market thrashing could continue and the risk of the economy sliding into recession will be relatively high.
It’s important to remember that while recession risks are heightened, consumers are coming from a very strong financial position. Unemployed people get jobs. If you have a job, you get a raise. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. From a consumer point of view, it is still too early to sound the alarm.
At this point, a downturn is unlikely to turn into an economic disaster as the financial health of consumers and businesses remains very strong.
As always, long-term investors should remember that recessions and bear markets are only part of the story when entering the stock market for long-term returns. Although markets have had a terrible year, the long-term outlook for equities remains positive.
For more on the development of the macro story, see previous TKer macro countercurrents »
Here’s why this is an unusually unfavorable environment for the stock market: Market beating will continue until inflation improves 🥊 »
For a closer look at where we are and how we got here, read: The intricate jumble of markets and economies explained 🧩 »
This post was originally published on TKer.co
Sam Ro is the founder of Tker.co. You can follow him on Twitter at @SamRo
For the latest stock market news and in-depth analysis, including events moving stocks, click here
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on TwitterFacebook, Instagram, Flipboard, LinkedIn and YouTube