07.13.22
Economic Outlook Suddenly Not So Dire
by: Rich Blake
It's the dead of summer, but for advisors and investors there's a hint of spring-like hope in the air, sort of.
For starters, as Dealbreaker pointed out, how much worse can it get?
In other words, just because the stock market endured its worst first-half since 1970, with the S&P 500 losing 21% since its January peak, there nevertheless is no meaningful data to imply the second half is going to be just as bad or worse.
In fact, back in 1970, stocks declined by 21% during the first two quarters; and then the market rebounded to gain 27% in the second half of the year.
So cheer up – at least there is some historical precedent to do so.
Stiff Macro Headwinds
However, macro forces – sharply rising inflation and central-banker-controlled interest rates – continue to roil large institutions, creating volatility as risk-assets are liquidated.
Many economists insist a recession is inevitable. Currency markets seem to agree.
The U.S. dollar index (DXY) recently hit a two-decade high, and a surging greenback almost always signals a looming recession.
Still, positive signals are lurking in plain sight: falling gas prices; better-than-expected job growth.
Soaring prices for lumber and copper have dramatically pulled back. It's a sign of construction slowing, yes, economically troubling on the one hand; but then again, a commodities cool-down is a harbinger of inflation having peaked.
"Financial advisers have turned surprisingly bullish on the second half," Investment News declared earlier this month, citing an InspereX survey that showed almost 90% of survey respondents holding on to belief the stock market can erase most of the losses that occurred during the first half.
‘Maybe the Worst Is Behind Us’
“I think advisers are bullish on everything turning around,” said Chris Mee, managing director at InspereX. “They’re starting to see the bottom on some of these stocks,” he said. “Maybe the worst is behind us.”
Bear markets don’t last forever, but they can grind on and on, as they did for a major portion of the 1970s.
Mee, per FA, has overseen seven of these sentiment surveys over the past two years, gauging the changing mood of advisors through the pandemic.
As far as the relative optimism that comes through, he finds it surprising.
Countering the InspereX survey results is the University of Michigan's closely watched Surveys of Consumers, a kind of consumer sentiment gold standard.
The June version was revised lower to a score of 50, making it the lowest level ever for the university’s monthly data sets, which trace back to the mid-1970s.
Inflation, of course, remains a key contributor to diminished consumer sentiment, the university said.
Supply Chain Relief?
"It’s easy to miss good news," said FA's John Authers, offering at least one big reason for optimism, one that has been easy to overlook because it lurks in the weeds of supply chain logistics measurement.
The New York Fed now keeps an index of global supply chain pressure, which adds together shipping and freight costs and other measures of how swiftly supply chains are moving. The latest version of the index shows that pressure remains elevated but is unmistakably declining, Authers noted.
Ed Yardeni of Yardeni Research confirms this trend as well. The global securities-markets-watching veteran has a composite index consisting of delivery times and order backlogs, seen as a useful proxy for supply chain delays, and he collects data from five regional Fed banks. When looked at holistically,Yardeni found these pressures are beginning to ease, as shared on Yahoo Finance. “Supply-chain disruptions have eased significantly in recent months,” Yardeni wrote on LinkedIn.
This is a big deal because supplier delivery times have a relatively tight relationship with inflation rates, Yahoo Finance pointed out.
“The question is whether the drops in regional indexes [that are] tracking unfilled orders and delivery times during the first half of this year reflect more ample supplies or diminishing demand,” Yardeni noted.
Yardeni argues that if the decline is largely due to eroding demand, then prices should be falling sharply.
Consumer spending is viewed as still robust (a good thing) but in the past few weeks it has slipped slightly, when adjusted for inflation, according to investor Steve Ratner. A dip in spending is normally not great news, but with rampant inflation such a dip is a baby step to reversing a vicious cycle, particularly with respect to demand for everyday items, such as gasoline and groceries.
"This doesn’t mean inflation is over," as FA's Authers explained. "It does, however, suggest that one of the world’s most acute problems is beginning to ease."