Stock Market Rallies Strongly Today (in the Midst of Pervasive Gloom)
Talk to the average man or woman on the street and you are likely to hear how bad the economy is. Yet look around and you see restaurants are full, airports are busing at the seams, you can’t find a contractor to do repairs on your house, and jobs are going unfilled for lack of applicants. OK, there are problems. Buying a new or used car is difficult, and the price of a lot of stuff we buy is rising. But geez, the last time we had an economic downturn it didn’t look like this! I think we are turning into a nation of crybabies.
The stock market rallied strongly today as the Federal Reserve acknowledged that the economy is “softening” in the wake of interest rate hikes. The central bank still raised rates by ¾ of a %, but the bond market rallied alongside stocks for a change. Yes, it is true that rising rates are usually bad for bonds, but in this case the market had already anticipated the ¾% point rise, while the Fed’s comments led bond investors to conclude that future hikes will be less than expected as inflation comes back down under control.
So are we out of the woods? I wouldn’t draw that conclusion necessarily, but inflation is showing some signs of slowing. We can all see it in gas prices, which have eased off as high prices a) crimped demand and b) incentivized refineries to max out their production. With refineries running at close to 100%, however, the market is highly exposed to supply interruptions due to hurricanes, fires, maintenance issues, etc. The microchip shortage has also been easing in recent months (just as Congress rushes to the “rescue” with billions and billions of dollars to add more capacity – we find we may not really need it…government planning at its finest!) At the same time, supply bottlenecks due to Chinese Covid policies seem likely to continue, and food prices are at the mercy of the weather and Mr Putin’s whims. So things are looking better on some fronts, but problems remain in other areas and there are certainly a myriad of things that could go wrong from here.
Are we heading for (or already in) a recession? Some will say we are almost there because the economy has stalled in terms of nominal growth. But demand for labor has been so strong that even in the face of slowing economic activity, employers are still hiring at a record pace, while jobless claims are almost nonexistent. Housing has slowed down due to higher interest rates, but we were getting perilously close to bubble territory in the housing market anyway, so this is ok. Business activity will have to fall off a lot further than this, and employment will have to start to fall, before I would see anything I can recognize as a recession.
Meanwhile, INVESTORS ARE LIKING THE IDEA OF ECONOMIC SLOWDOWN with stocks up well over 2% today. How so? Because the market sees a modest slowdown and some progress on inflation as a) decreasing the odds of a major recession down the road and b) decreasing pressure on the Federal Reserve to continue to raise interest rates. Meanwhile, many companies are reporting profits that are surprisingly strong.
Today’s strong market action is building on recent tentative market recovery. With todays rally, the S&P 500 is up over 8 percent from its low on June 16. With interest rate expectations falling, the bond market has also bounced back.
With the year we’ve had, as investors, we will take whatever good news we can get. Yeah, there may be another shoe to drop, and in recent months several of these rallies have been quckly followed by reversales - but for now it seems the “glass half full” guys are in charge of the markets. And once again, we see how quickly and unexpectedly markets can turn around, and how completely impossible it is to "time markets".