April 15th 2023: Optimism amid Uncertainty: US economy is slowing but outlook remains positive The US economy continues to be on a generally healthy footing. On the JP Morgan earnings conference call, CEO Jamie Dimon said that consumers are still spending and have strong balance sheets, and businesses are in good shape. As I wrote last week, financial conditions will likely tighten as lenders become more conservative. It is still unclear if this will cause a recession. The Fed is forecasting a recession, and there are clear signs of a slowdown in the recent retail data. Shoppers are pulling back on purchases of items such as vehicles, furniture, and appliances amid climbing interest rates. The bad news is layoffs are rising quickly and no longer just at technology and media companies. CNBC noted that announced layoffs are 396% above year-ago levels. The layoff announcements this year have helped to push stocks higher because it’s been part of the following market narrative: Inflation is too high → the Fed is raising interest rates → interest rates are slowing consumer spending → a recession eventually hits, and companies cut costs → there will be a drop in revenue, but profits will not fall as much because of lower costs → if there is a recession, the Fed will then have to cut rates → growth stocks rally because rates fall, and economic growth returns.
On the inflation front, there was some positive news this week with the producer-price index falling 0.5% in March from the prior month. This was the largest monthly decrease since April 2020. However, it’s important to note that financial conditions remain strong, and this could continue to drive inflation higher. One factor that contributed to the current state of strong financial conditions is the amount of money that was printed, which has increased the money supply and led to higher prices. Additionally, there are other signs of inflationary pressures, such as oil prices rising 25% over the last month and the jump in speculative cryptocurrencies this year. It remains to be seen how long these trends will continue and how they will ultimately impact the broader economy. Given all the economic reports over the last month, the market expectation is that the Fed will raise rates by 0.25% for the final time at their next meeting in early May. This is part of the reason why growth stocks have continued to rise. Over the last 40 years, during the period between the Fed’s final rate hike of a tightening cycle and the first rate cut in the following easing cycle, the stock market averaged an 11% return, while bonds returned an average of nearly 7% (source: Bloomberg).
I believe that investor expectations are on the high side for technology companies in a slowing economy. This sector will continue to be the most volatile. There is a risk that inflation remains high because of geopolitical tensions, higher energy prices, and worsening relations with China. I’m continuing to be prepared for a broad range of economic outcomes. This market continues to offer suitable investments for almost every type of investor with different risk tolerances. There is a minimum 4-5% return in money markets and treasuries for lower risk investors, and for higher risk investors, high-priced large-cap growth equities have been on an upward trend.
While the tech market has been very strong, it has been a narrow market overall this year. This means that the performance of the majority of the market is driven by a small group of large growth stocks, rather than a diverse range of stocks. The current stock market has been exhibiting characteristics of a narrow market, with a few large growth companies having a disproportionate impact on the market’s overall performance. As a result, the performance of these companies can heavily influence the performance of the overall market.
I expect the headlines will continue to be dominated by the potential for a recession later this year. It’s been a saver’s market for people that have money to buy stocks and bonds. For people with high debt levels paying the high costs of interest, they will likely be the ones that fall behind in this economic environment. While there are certainly risks and challenges facing the US economy, there are also reasons for optimism. Consumers and businesses remain in good shape, and policymakers have demonstrated a willingness to take action to address potential issues. I expect the Fed to cut rates at the first signs of a slowdown. This is why the US economy is poised for a quick recovery if this scenario plays out at the first sign of a recession.
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The US economy continues to be on a generally healthy footing. On the JP Morgan earnings conference call, CEO Jamie Dimon said that consumers are still spending and have strong balance sheets, and businesses are in good shape. As I wrote last week, financial conditions will likely tighten as lenders become more conservative. It is still unclear if this will cause a recession. The Fed is forecasting a recession, and there are clear signs of a slowdown in the recent retail data. Shoppers are pulling back on purchases of items such as vehicles, furniture, and appliances amid climbing interest rates. The bad news is layoffs are rising quickly and no longer just at technology and media companies. CNBC noted that announced layoffs are 396% above year-ago levels. The layoff announcements this year have helped to push stocks higher because it’s been part of the following market narrative: Inflation is too high → the Fed is raising interest rates → interest rates are slowing consumer spending → a recession eventually hits, and companies cut costs → there will be a drop in revenue, but profits will not fall as much because of lower costs → if there is a recession, the Fed will then have to cut rates → growth stocks rally because rates fall, and economic growth returns.
On the inflation front, there was some positive news this week with the producer-price index falling 0.5% in March from the prior month. This was the largest monthly decrease since April 2020. However, it’s important to note that financial conditions remain strong, and this could continue to drive inflation higher. One factor that contributed to the current state of strong financial conditions is the amount of money that was printed, which has increased the money supply and led to higher prices. Additionally, there are other signs of inflationary pressures, such as oil prices rising 25% over the last month and the jump in speculative cryptocurrencies this year. It remains to be seen how long these trends will continue and how they will ultimately impact the broader economy. Given all the economic reports over the last month, the market expectation is that the Fed will raise rates by 0.25% for the final time at their next meeting in early May. This is part of the reason why growth stocks have continued to rise. Over the last 40 years, during the period between the Fed’s final rate hike of a tightening cycle and the first rate cut in the following easing cycle, the stock market averaged an 11% return, while bonds returned an average of nearly 7% (source: Bloomberg).
I believe that investor expectations are on the high side for technology companies in a slowing economy. This sector will continue to be the most volatile. There is a risk that inflation remains high because of geopolitical tensions, higher energy prices, and worsening relations with China. I’m continuing to be prepared for a broad range of economic outcomes. This market continues to offer suitable investments for almost every type of investor with different risk tolerances. There is a minimum 4-5% return in money markets and treasuries for lower risk investors, and for higher risk investors, high-priced large-cap growth equities have been on an upward trend.
While the tech market has been very strong, it has been a narrow market overall this year. This means that the performance of the majority of the market is driven by a small group of large growth stocks, rather than a diverse range of stocks. The current stock market has been exhibiting characteristics of a narrow market, with a few large growth companies having a disproportionate impact on the market’s overall performance. As a result, the performance of these companies can heavily influence the performance of the overall market.
I expect the headlines will continue to be dominated by the potential for a recession later this year. It’s been a saver’s market for people that have money to buy stocks and bonds. For people with high debt levels paying the high costs of interest, they will likely be the ones that fall behind in this economic environment. While there are certainly risks and challenges facing the US economy, there are also reasons for optimism. Consumers and businesses remain in good shape, and policymakers have demonstrated a willingness to take action to address potential issues. I expect the Fed to cut rates at the first signs of a slowdown. This is why the US economy is poised for a quick recovery if this scenario plays out at the first sign of a recession.