The first quarter of 2023 ends this week! Wow, that was quick!
Are we headed for a recession? Will inflation continue to moderate? Will Stocks remain resilient? What’s the bond market suggesting?
Recession?
Every person or investment firm you hear is suggesting we will have a recession sometime later this year. When we parse the news, it is hard to argue the other side:
- The recent mini-banking crisis should slow down business and consumer lending.
- The mini-banking crisis could turn into more than suggested.
- Household excess reserves accumulated during Covid are being spent down rapidly.
- Credit Card balances are rising.
- Supply chain issues have not been resolved (think chips, not potato).
- Fed has raised the discount rate to 5% and wants to go higher.
- The Fed has said, the unemployment rate will increase to 4.5% by year-end.
- Corporate profits are expected to continue to trend lower (think layoffs).
On the other side of the coin, our economy has remained resilient. People are spending. Perhaps not on the same items as two years prior, however travel and recreation spending continue to increase. Over the weekend, a friend asked about going to Aruba next February. I looked at room availability… forget about it. Booked solid!! Telling, at least for the time being.
Personally, I think we will go through a recession. It will be a short-term challenge to balance the potentially slowing economy with on-going inflation concerns.
The good news, this situation will come to an end. It always does!
Inflation
We are realizing inflation is not an easy situation to rectify. The Fed wants to destruct demand, so we do not need as many goods and services, providing time for supply chains to catch up. The game plan does sound economically logical however not humanly sensitive.
It is not the Fed’s fault, however, we shipped our manufacturing overseas years ago! Any ideas who to blame? Both sides of the aisle in my opinion. This was the root of the cause!
So far, the Fed has not been successful, as demand for goods and services has remained resilient. The rate of price increases (inflation) has moderated; however, we are still way above the Fed’s target.
The Fed believes we need inflation down to 2%. I’m thinking if that happens, the path from here to there will be very challenging. A 3% to 3.5% inflation rate target seems much more realistic.
Let us see what happens, assuming banks get tighter with lending standards and household excess reserves vanish. Hopefully, this will go a long way to bringing us price stability and a smoother type of landing.
Stocks and Bonds
The S&P 500 and Nasdaq are positive year to date. The Dow Jones and the Russell 2000 are negative. The first quarter has witnessed a switch from value stock to growth stock out performance. The indexes appear to be pricing in a very shallow recession, or no recession.
Bonds are acting like bonds, at least for now. Bond index returns are positive, mostly in the 3% year to date range. This flight to quality is suggesting the worst may be in front of us.
The headwinds for the market are of course, inflation, the banking issue, additional rate hikes, and a true recession. Has the market priced this in?? I do not believe so. Will inflation, the banking issue, rate hikes, and a recession all continue to play out and get worse? The obvious rarely plays out. I expect a bumpy ride from here, however I do believe there will be brighter days ahead in the not too distant future.
