The Week in Review June 27, 2022
A Tale of Two Economies
The Federal Reserve is aggressively raising interest rates to slow economic growth and break the back of inflation. “We will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%,” Fed Chief Jerome Powell said last week in his testimony before two congressional committees.
His often-stated goal: an economic soft landing that slows inflation without a recession. But he conceded that a recession “is certainly a possibility.” At least Powell acknowledged the possibility.
What is unclear is whether the Fed will blink in the face of a recession, assuming “compelling evidence” is still elusive.
But where are we today? It’s a tale of two economies. On the one hand, job growth has been strong. The U.S. BLS reported the unemployment rate held at 3.6% in May, while nonfarm payrolls rose a healthy 390,000. Payroll growth averaged 540,000 since January 2021.
By comparison, monthly gains during the 2010s averaged just 183,000, per U.S. BLS data.
Normally, strong job creation would be the by-product of a robust economy, as businesses hire new employees amid strong demand for their goods and services. Today, however, things are more nuanced coming out of the pandemic and lockdowns.
The Atlanta Federal Reserve has a real-time GDP tracker. It’s called GDPNow. It’s a model that inputs economic data in real time, offering estimates at regular intervals. As of June 16, its estimate was 0.0% for Q2. June’s data has yet to be included.
Moody’s High-Frequency GDP Model comes in at 0.6% as of June 17. It’s not much better.
Simply put, job growth is impressive, as companies play catchup to fill open positions. But overall economic growth has slowed, as the economy teeters on the edge of stagflation.
Final thoughts
Disciplined investors with an evidence-based financial plan have historically had the best chance of reaching their financial goals.
It’s a roadmap that accounts for unexpected market pullbacks. We know they will occur, but pinpointing turbulence in advance is difficult.
Yet, we also know that attempting to time the market is not a realistic strategy.
“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two,” legendary investor Warren Buffett once quipped.
He’s right. A few get lucky from time to time, but no one can consistently call market tops and market bottoms.
But, as we have seen before, market bottoms surprise most analysts. No one rings a bell when a bear market ends. Instead, investors usually sniff out better economic news before it hits the headlines.
One final remark: when the Fed preemptively acted against inflation in 1984 and 1994 and engineered soft landings, stocks did exceedingly well in 1985 and 1995, according to Historical Returns on Stocks, Bonds and Bills 1928-2021, provided by the NYU Stern School of Business.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
Exxon Mobile has gained 156% since it was removed from the DOW in August 2020 versus a 30% decline for Salesforce which was added to the index. Had the Dow Jones Industrial Average skipped its 2020 reshuffle, the index would have beat its current performance by about 5.6% since then, and about 1.6% this year. - Business Insider, June 6, 2022
Nancy Brophy, an Oregon-based romance novelist, and author of the 2011 essay “How to Murder Your Husband,” was found guilty last month of murdering her husband. - The Guardian, May 26, 2022
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