A version of this post first appeared on TKer.co
Shares rose last week as the S&P 500 jumped 2.4% to close at 4,505.42. The index is now up 17.3% year-to-date, up 26% from the Oct. 12 closing low of 3,577.03, and down 6% from the Jan. 3, 2022 record closing high of 4,796.56.
Before dropping slightly on Friday, the S&P closed Thursday at 4,510.04, the highest level since April 2022.
It should be noted that the S&P is now above everything Year-End Targets Wall Street forecasters have been in for the year.
This speaks to how difficult it can be to predict short-term moves in the market when the most thrifty professionals and full-time employees at the highest echelons of the industry find themselves on their heels.
What was driving the march?
Good, Flexible economic growth and the Improve the perception of the activity helps.
cooling inflation and a The Federal Reserve, which has become less hawkish also helps.
More importantthe Improve expectations for earnings Definitely helps.
“If earnings recover as consensus expects, and if we get a soft landing, shares are likely on their way to new highs,” said Juren Timmer, global macro director at Fidelity, books Wednesday.
He added, “Currently, it is estimated that the profits of Standard & Poor’s will shrink by 9% in the second quarter and then decline in the third quarter of this year, before recovering in 2024.” “If this is true, then the rally in equities and the increase in P/Es that we have seen since last October could be justified and could continue.”
Actually, we’re in the midst of it A mild recession in earnings is widely expected. But as Stock will not doThey seem to be pricing in the future more than the present or the past.
However, sentiment among stock market forecasters on Wall Street is anything but foamy.
Although many Wall Street strategists have They revised their 2023 goals for the S&P 500Many expect the index to end lower by the end of the year. according to bloombergThe average strategist’s target would imply a 6.6% decline in the S&P during the second half of the year.
Who knows what stocks will do in the coming months? Maybe they go up. They might come off.
We know that Prospects for earnings growth in the coming years are bullish. So it wouldn’t be too surprising if a year or two from now, stocks were up. This will be consistent with The long history of how earnings trend and how stocks move with those earnings.
market He spends much more time going up than down. If history tells us one thing about the difference between bulls and bears, it is this The bulls are usually right
Total cross currents review 🔀
There were a few notable data points and macroeconomic developments from the past week to consider:
🇺🇸 The state of the economy according to the largest banker. from Jamie Dimon, CEO of JPMorgan“The US economy remains resilient. Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong. However, there are still significant risks in the landscape Prompt – many of which I’ve written about over the past year.
Consumers are slowly using up their cash reserves, core inflation has been stubbornly high (raising the risk of higher interest rates, staying higher for longer), no quantitative tightening of this measure has occurred, the fiscal deficit is large, the war in Ukraine is continuing, which in addition to the massive humanitarian crisis for Ukrainians , has significant potential impacts on geopolitics and the global economy.”
🎶 Taylor Swift’s economic impact attracts the attention of the Federal Reserve. the July Beige Book Fed From economic anecdotes he concluded, “Overall economic activity has increased slightly since late May.” As noted Interesting thing In the Philadelphia area: “Although the recovery in tourism in the area overall has slowed, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the start of the pandemic, due in large part to an influx of guests to Taylor’s quick parties in City “.
🎈 Inflation cools. the Consumer price index The Consumer Price Index (CPI) in June rose 3.0% from a year ago, the lowest level since March 2021. After adjusting for food and energy prices, the core CPI rose 4.8%, the lowest level since October 2021.
On a monthly basis, the Consumer Price Index increased by 0.2%. Core CPI rose 0.2%, the lowest level since August 2021.
If you are Make the trend of the three months a year In the monthly numbers, the CPI is up at a rate of 2.2% while the core CPI is up at a rate of 3.5%.
The bottom line is that while inflation rates have been trending lower, many measures are still above the Fed’s target rate of 2%.
🤷🏻♂️ Consumer expectations for inflation are falling. From the Federal Reserve Bank of New York June survey of consumer expectations: Average inflation expectations fell for the third consecutive month in the one-year horizon coming from 4.1% in May to 3.8% in June, the lowest reading since April 2021. The gauge is now down 3 percentage points from its highest in the series. In June 2022. The decline is widespread across demographic groups. In contrast, average inflation expectations remained unchanged at 3.0% over the next three-year horizon and increased by 0.3 percentage points to 3.0% over the next five-year horizon, the highest reading since March 2022.
📉 Online prices are going down. from bloomberg: “Prices of goods sold online fell 2.6% in June compared to a year earlier, according to data from Adobe Inc. released on Tuesday. It was the largest drop since May 2020, and the 10th consecutive month of year-over-year declines. More than half of the categories showed The 18 major price declines that Adobe tracks year-over-year.
👍 Wage growth outpaces inflation. from Axios“Real average hourly earnings increased 1.2% in the 12 months ending in June,” the Labor Department said Wednesday, after releasing its latest inflation data. It rose in May, but before that it had been in negative territory for nearly two years, as labor increases weren’t enough to keep up with soaring inflation. For production workers and unsupervised workers, this figure was even stronger, with an annual increase of 2.2% in real average hourly wages.
💳 Consumers are spending. here Renaissance Macro Research on BEA dataCar sales are likely to pick up in July, but on top of that, weekly data on consumer spending based on payment card transactions is playing strong. For the fourth week of July, spending rose 14.9% versus the pre-pandemic baseline. The four-week moving average has been flat, ~10%.”
💼 Unemployment claims are going down. Initial claims for unemployment benefits It fell to 237,000 during the week ending July 8, down from 248,000 in the previous week. While this is higher than the September low of 182,000, it continues to trend at levels associated with economic growth.
👍 Consumer sentiment jumps. from the University of Michigan July consumer surveyConsumer sentiment rose for the second month in a row, rising 13% over June and reaching its best reading since September 2021. All components of the index improved significantly, led by a 19% rise in long-term business conditions and a 16% increase. In short-term business conditions. Overall, sentiment rose for all demographic groups except for low-income consumers. The sharp rise in sentiment was largely attributed to the continued slowdown in inflation along with stability in the labor markets.”
👍 Small business morale is rising. the NFIB Small Business Optimism Index (via notes) improved in June.
The main driver of the rise in optimism was the improved outlook towards the economy. from NFIB: “The economy appears to be slowing, but the ‘data’ isn’t a recession – except for leading indicators that are still more negative. So where is the recession hiding? Housing appears to have bottomed out and is moving modestly, consumer spending is flat but not heading towards exits, and credit statistics Some problems appear but they are not critical, and there are some big real estate problems in the city, but they are not widespread…”
As the NFIB shows, the more realistic “hard” components of the index held up much better than the more emotion-oriented “soft” components.
Keep in mind that during times of stress, soft statements tend to be exaggerated more than actual hard statements.
📈 Inventory levels have increased. according to Census Bureau data Released on Tuesday, wholesale inventories stood at $913.7 billion in May. The inventory/sales ratio was 1.41, up significantly from 1.30 in the prior year.
📈 Estimates of near-term GDP growth remain positive. the The GDP model is now available for the Federal Reserve Bank of Atlanta It sees real GDP growth rising at a rate of 2.3% in the second quarter. Although the estimate of the model is far from high, it is nonetheless very positive and is higher than its initial estimate 1.7% growth as of April 28th.
Putting it all together 🤔
We keep getting clues that we can see a file The “moderate” bullish soft landing scenario Where inflation cools to manageable levels without the economy having to plunge into recession.
The Federal Reserve has recently adopted a less hawkish tone, Recognition on February 1 that “For the first time, the process of reducing inflation has begun.” on May 3The Fed has signaled that the end of rate hikes may be here. And at the policy meeting on June 14, it kept interest rates unchanged, ending a streak of 10 consecutive rate increases.
In any case, inflation still has to fall further before the Fed can get comfortable with price levels. So we must We expect the central bank to keep monetary policy tightwhich means that we must be prepared for strict financial conditions (for example, higher interest rates, stricter lending standards, and lower stock valuations).
All this means Monetary policy will be unfriendly to the markets For now, the risks The economy plunges In a recession it will be relatively high.
At the same time, we also know that stocks are discount mechanisms, and that is to say Prices will have bottomed out before the Fed signals a major shift in monetary policy.
Also, it is important to remember that while recession risks may rise, Consumers come from a very strong financial position. The unemployed get jobs. Those who have jobs get raises. And many still have excess savings To take advantage of. Indeed, strong spending data underscores this fiscal resilience. So it is It is too early to sound the alarm from a consumption perspective.
At this point, ie An economic downturn is unlikely to turn into an economic disaster Given that The financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember this recessions And bear markets equitable part of the deal When you enter the stock market with the goal of making long-term returns. while The markets have had some very difficult yearsThe long-term outlook for stocks It is still positive.