The Economy's Chill Waves vs. Stock Market's Heatwave
Economic Slump Warrants Fed Intervention - What's Taking Them So Long?
In the midst of whispers about an economic chill, the equity market just can't seem to get enough. Major indexes scaled new peaks last week of May, with gains ranging from 1.3% to 2.0%. For the month, they soared up to 9.6%, with the Nasdaq leading the charge. But here's the kicker: this market bliss appears to be fueled more by trade frivolities rather than actual economic vigor.
All seven heavyweights sailed through the week with gains in the 2% - 3% range, making it a prosperous week for equity investors. The monthly average also shone brightly, at nearly +2.5%. Only Apple took a hit, with a monthly loss. Yet, on a year-to-date basis, the Magnificent 7 continue to struggle, hovering just above negative territory (-4.2%).
Economic Softness, Not a Full-Blown Recession... But Close
The economic mood is softening, but we're not quite at Recession levels, yet.
- A recent survey by the New York Federal Reserve revealed that a staggering one in eight respondents might not be able to meet a minimum debt payment within the next three months.
- Wall Street Journal's editions painted a worrying picture. Job cuts by retail giant Walmart and shrinking vacation plans among Americans are signs of a slowing economy. Moreover, the Job Openings and Labor Turnover Survey indicates a sharp drop in new hires and a decline in job hopping, indicating a weak jobs market.
- The unemployment rate crept up to 4.2%, and the Federal Reserve expects this figure to climb to 4.5% by the end of the year. However, we foresee it reaching 5% as economic softness deepens.
- Q1 GDP growth dipped to -0.2%, and we anticipate Q2 following in its tracks. Another red flag comes from the housing sector, with single family starts nose-diving and pending home sales plummeting. The housing market might be facing a downturn, with the Pending Home Sales Index now at its lowest level since the Great Recession in November 2008.
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Unfortunately, the Case-Shiller Home Price Index showed a decline (-0.3%) in March, the first time since January 2023. This and other indicators, such as rising auto and credit card delinquencies, elongating finish apartment unit lease-up times, and plunging durable goods orders might indicate a Recession is looming.
Will the Fed Adjust?
When it comes to economic downturns, the Federal Reserve plays a crucial role in remedying the situation by adjusting monetary policy. However, they seem to be lagging behind this time. The Fed is currently waiting for the initial slowdown reported in survey data to reflect in concrete economic indicators before taking action.
This cautious approach might backfire, as it could lead to the Fed rushing to implement further measures once the downturn intensifies. Or, they could end up underestimating the severity of the slowdown and risk prolonging it.
One area of concern is inflation. Although the year/year CPI inflation rate has been inching closer to the Fed's target of 2%, a closer look reveals a three-month annualized CPI rate of only 1.6%. Excluding a lag in rent calculations, the three-month annualized rate drops to a meager 0.7%. Inflation could soon fizzle out, potentially leading to a bout of deflation.
Based on these observations, the Fed appears to be lagging behind the curve. Aggressive easing is needed immediately, but market odds for a rate cut in June are barely 5%, and only 27% for July. By all accounts, expectations for the next cut are pinned to the September meeting.
In Conclusion
The disconnect between the roaring stock market and subdued economic indicators raises several concerns. If the Fed fails to act swiftly, the risk of a severe market correction increases. Misaligned market expectations can also impact consumer spending, business investments, and hiring, further adding to the economic uncertainty.
Now, let's not forget about the tariff battles and trade tensions lurking in the background. These factors can increase volatility and uncertainty, potentially exacerbating both the market and economic slowdowns. As global economies continue to intertwine, domestic events can have far-reaching consequences on the world scene.
So yes, it's 'the economy is cooling' vs. 'the stock market is hot'. And as a tandem of sorts, this combination brings a hefty dose of uncertainty, risk, and volatility to the fore. Keep your eyes peeled and your seatbelts fastened, folks. It's gonna be a bumpy ride!
The tremendous gains in the stock market, despite the economic softening, might be driven more by trade frivolities and uncertainty rather than actual economic strength. As the Fed deliberates on adjusting monetary policy, a disconnect between the roaring market and subdued economic indicators raises concerns about potential market volatility, increased risks, and uncertainty for business and consumer sentiment.
