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Thoughts On
The Macro Themes
By
Dave Moenning on Jun 07, 2023 07:46 am
With the Fed meeting
on tap next week (the rate announcement is slated for 2:00 pm Wednesday
with the Powell presser to follow) and the crowd split on whether or not
the country's merry band of central bankers will hike rates again or take a
pass to get more data, it is fairly easy to argue that investors aren't
likely to make major commitments beforehand.
So, instead of
joining the crowd of prognosticators opining about what the Fed may or may
not do, I thought it would be a good idea to spend some time this week
looking at the big picture. So, without further ado, let's quickly run
through the major macro drivers in order to get a feel for the fundamental
backdrop for this market.
Recent Crises
"Solved"
Looking at the most
recent drivers to the near-term action, the good news is that both the debt
ceiling and the so-called banking crisis can be placed in the
"solved" category. Yay!
Sure, Janet Yellen
needs to refill the Treasury's coffers to the tune of about a trillion
dollars over the next few months, which could certainly become a bit of a
liquidity drag on the financial markets. And yes, there is a boatload of
commercial real estate loans that are "lurking" on regional bank
balance sheets, which could become problematic. But the key is these
potentially market-killing issues are no longer front-and-center threats to
the markets/banking system/economy.
So, it hasn't been
terribly surprising to see stocks breathe a sigh of relief lately. As in
the S&P 500 getting close to "bull market territory" (i.e.
+20% off the bottom) and breaking out above the recent trading range in the
process. As in the NASDAQ and NDX continuing their leadership charge on the
back of the AI theme. And heck, even the beaten down areas have shown some
signs of life recently.
With the debt and
banking crises out of the way, investors of all shapes and sizes can return
their attention to the fundamentals. You know, stuff like the economy, the
Fed, inflation, and earnings.
"It's The
Economy, Stupid"
As far as the
economy is concerned, you are likely aware that just about everybody on the
planet expects the Good 'Ol USofA to slip into recession - and soon. The
arguments for said downturn certainly make sense except for the simple fact
that it just hasn't happened. Nope, despite all the teeth gnashing and
table pounding over the past year and a quarter, the overall economy
continues to hang in there.
Make no mistake
about it; the data show the pace of economic growth IS slowing. Just about
every new economic report sports a slowdown theme. However, my take is that
the slowdown is occurring from a strong pace. Remember, slowing growth is
NOT the same thing as a recession.
And yes, it is easy
to argue that the manufacturing sector is indeed in contraction mode.
However, the consumer and the services sectors appear to be doing just
fine, thank you. The reason is simple. Everybody has a job. And if you lose
one, there are still 1.6 jobs available for those looking for one.
So, yes Virginia,
the labor market remains strong. And if I've learned anything since
entering this game in 1980, it is that as long as John Q Public and family
have money in their pockets, they aren't likely to skip the trip to the
mall (or Amazon).
And lest we forget,
the consumer is responsible for more than 70% of the country's economy.
So... If the labor market is solid and consumers have money in their jeans,
it is hard to see how the economy is in deep doo-doo here. At least for now
anyway.
Oh, and for the
numbers geeks out there, the Atlanta Fed's GDPNow forecast, which is
effectively a real-time update to GDP, currently projects that as of June
1, the economy is growing at a 2% annual clip in the second quarter. Hardly
the debacle so many are predicting, right?
Inflation IS
Declining
Turning to the topic
of inflation, the members of the FOMC tell us on a regular basis that
inflation remains much too high and there is more work to be done to get it
down. While it is true that the inflation data the Fed uses are indeed
still too high, the key here is to recognize what the Fed is looking at.
Cutting to the
chase, the Fed keeps themselves busy reviewing data that, in my humble
opinion, is rearview mirror oriented. When one looks at more CURRENT
pricing data, the picture changes dramatically.
I could provide
several pages of examples here. But below is one that sums things up
nicely. It's the Prices Paid component of the ISM Services PMI. In other
words, what businesses in the services sector are paying. As you can
plainly see, the prices being paid by service providers are now BELOW where
they were when COVID reared its ugly head.
And according to the good folks at Yardeni Research, the ISM Services
Prices index is a pretty darn good precursor for what the CPI is going to
do in the future. See the chart below illustrating the relationship.
The key is there are
lots of examples suggesting that inflation is clearly declining - in
earnest. Which is something that has historically been very good for stock
prices. 'Nuf said.
The Fed is Just
About Done
While this is merely
my $0.02, I'm of the mind that with high frequency inflation data in
decline and the Fed's aggressive hiking campaign starting to
"break" stuff, Powell & Co. are likely to take their foot off
the gas soon. Maybe not next week. Or maybe not in July. But I think it is
a pretty safe bet that the Fed is very close to being done hiking rates.
Why should I care,
you ask? Because history shows that the stock market has advanced when the
Fed stops hiking rates. Please understand, I'm not talking about what will
happen next week, next month, or even next quarter. Trying to predict what
will happen next in Ms. Market's game is a fool's errand. No. I'm talking
about the big picture here.
So... With the
economy growing, inflation falling, earnings rising, the Fed ready to pivot
from their antagonistic stance, and the AI theme bolstering enthusiasm, I
find it really difficult to be pessimistic here.
Sure, stocks could
pause or pull back as things are starting to become a bit heated. But from
a big picture standpoint, I remain seated on the bull train, and you can
color me an optimistic dip-buyer, for the time being.
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