Inflation is rising, the stock market is collapsing and consumers are increasingly concerned about their future. None of that is good, but it’s probably time to step on the brakes a little because of the worry of everything collapsing. Fears of a recession are certainly on the rise, especially after the US has already had a quarter of negative economic growth after GDP fell by 1.4% in the first quarter. All it takes is one more to steer the economy into a recession rule of thumb. But the job market is alive and kicking. Companies will fill more than half a million job openings a month on average by 2022, wages are rising – albeit not as fast as the cost of living – and companies are still monetizing at a healthy clip, with a 9.1% profit in the year. first quarter, according to FactSet estimates. However, it is still the inflation problem that the markets have faced the most. The good news is that once that starts to decline, it could boost investor and consumer confidence. The bad news is that it can take a while, like years. That’s partly because there are multiple factors influencing the fastest price growth in more than 40 years. There are the residual effects of massive fiscal and monetary stimulus, pandemic-related supply chain backlogs and the associated risks of the war in Ukraine. “In economic terms, you have to keep asking yourself whether there is a real chance of a recession in the United States. For me, the answer is ‘no,'” said Jim Paulsen, chief investment strategist at The Leuthold Group. “All those separate fears are one fear. It all has to do with inflation, that’s the key here.” Whether the 8.3% inflation rate and associated Federal Reserve rate hikes are enough to bring the economy to its knees is now hotly debated. Most Wall Street economists are raising their expectations for a recession, with Goldman Sachs forecasting a 1 in 3 chance and Deutsche Bank, on the other hand, forecasting a steep period of negative growth beginning in late 2023. A Reliable Barometer The New York Using the Fed comparing 10-year and 3-month government bond yields only indicated a 3.7% chance of a recession at the end of April. Ed Hyman, chairman of Evercore ISI, recently said he thinks inflation has peaked, and hedge fund titan David Tepper of Appaloosa Management recently told CNBC that he is pulling his short position on the Nasdaq, whose components are most prone to higher prices. interest rates. However, the ongoing inflation scares investors enough to send the tech-focused Nasdaq far into a bear market and the S&P 500 and Dow Jones Industrial Average not far behind. “In the market it’s all about technical aspects and finding a bottom. We need to see capitulation, but there are technical aspects that keep breaking through,” said Paulsen. Paulsen sees a better fundamental picture than the technical data indicates, mainly because of the strength of the balance sheets of households and companies. He is also in the camp, along with JPMorgan strategist Marko Kolanovic and others, as he sees inflation peaking in March. Household debt rose consistently last year, rising 8% in the fourth quarter to bring the total to nearly $16 trillion. However, as a share of disposable income, according to Federal Reserve data, it is only about 9.4%, half a percentage point lower than before the pandemic. Corporate debt compared to GDP is also lower than before Covid. Paulsen said investors should focus on longer-term strength and invest accordingly. He points to frontier markets, emerging markets excluding China and the all-country index excluding the US MSCI as places that could outperform the S&P 500. One way to play frontier markets is through the iShares MSCI Frontier and Select EM ETF. An ex-China play is through the Columbia EM Core ex-China ETF. Trying to thread the needle… Finding both safety and outperformance is a tricky business with the countercurrents facing the market. The approach of Scott Knapp, chief market strategist at CUNA Mutual Group, tries to thread that needle by betting on a brighter future while dealing with the realities of the present. In Knapp’s base case for a hard landing, the Fed would have to tighten aggressively to bring inflation back to its 2% target, while stunting growth and hurting the market more. However, he leaves room for a non-negligible chance that inflation will react more quickly to rate hikes and require less Fed tightening. “The change in [inflation] expectations trigger a rally in markets that will likely happen before people know it. Such a rally will be less respected than most rallies,” he said, describing the latter scenario. “People will only believe it in their rearview mirror.” “Investors should think like options traders, rather than relying on predictions that are unreliable.” to evaluate the opportunities and invest accordingly across the spectrum while still holding hedges against left-wing events. That’s what options traders do, and they don’t rely on it to predict the future.” ‘…With a pair of boxing gloves’ Anyone looking into the future sees a potentially bleak picture. The Fed is trying to tame inflation without crushing growth, and history suggests it’s a tough, but not impossible, job. Consumers aren’t convinced it could happen: Friday’s widely viewed confidence survey from the University of Michigan hit a 10-year low, with buying conditions for durable goods reaching their lowest level in history dating back to 1978. Inflation expectations for the next year they were stuck at 5.4% and 3% for the next five to ten years, both levels well above the Fed’s comfort. “trying to thread the needle with a pair of boxing gloves,” said Joseph Brusuelas, chief US economist at RSM. “We are in a very difficult situation here, if they delay up to 1% [GDP growth] they are going to cause a growth recession as they declare victory. That’s a difficult picture here.” Indeed, reverberations are being felt across multiple parts of the economy. The Cass Freight Index for April showed a 0.6% decline in volumes in April, after a 0.5% increase in March, and the accompanying story accompanying the survey was “It’s not encouraging. After a nearly two-year cycle of rising freight volumes, the freight cycle has shifted back with a thud,” the report said. “The prospect of a freight recession is now significant as goods substitution shifts back to service spending and inflation general spending is slowing, especially through higher fuel prices and by raising interest rates.” Brusuelas also estimates the probability of a recession in the next 12 months at about 33%, with the situation in Ukraine and Covid lockdowns in China. Deutsche Bank, which has the bleakest forecast on the street, praised Fed Chair Jerome Powell and his fellow central bankers for following the right path on inflation, even with the “him and his” consequences. [Federal Open Market Committee] colleagues know that based on the painful experience of the 1970s and early 1980s, the sooner the inflation problem is addressed, the lower costs will be and the sooner the economy returns to a more desirable growth path,” the bank said. said in a note to customers: “The road ahead will not be easy, but the Fed is on the right track.”
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, USA, May 13, 2022.
Brendan Mcdermid | Reuters
Inflation is rising, the stock market is collapsing and consumers are increasingly concerned about their future. None of that is good, but it’s probably time to step on the brakes a little because of the worry of everything collapsing.