Conflicting Data
Conflicting Data
During the second quarter, both the stock and bond markets experienced above normal volatility as economic reports gave us mixed messages about where the economy is headed. For the quarter, stocks added to their gains from the first quarter, and had a solid first half of the year. After a strong first quarter, the bond market slowed slightly during the second quarter as the Federal Reserve indicated more interest rate increases may be required later this year. The economy is much stronger than most analysts thought it would be at this point.
The global and U.S. economies are continuing their recovery from the terrible effects of the Covid pandemic. So great was the economic damage that we will likely be dealing with the fallout for quite some time. Some changes, like remote work, may be here to stay. Other issues, like supply chain problems and higher inflation, are already improving.
There has been a lot of conflicting economic data that has made forecasting difficult. In spite of a yield curve that is at its biggest inversion in forty years, GDP is strong, with no recession in sight. We have the highest interest rates in years, but housing starts surged over 21% in May, the largest jump since 2016 and just the seventh increase of more than 20% since 1989. The Fed is trying hard to slow the economy down, but first quarter GDP was just revised upward, to 2%. Goldman Sachs lowered their prediction of a recession to only 25%. Consumer sentiment has dropped but remains higher than at this time last year and consumers are spending freely.
Monthly job growth has averaged 341,000 over the past twelve months, a remarkable number given the Fed’s rapid interest rate hikes. The rate of inflation has been dropping steadily since last Fall, and expectations for the long term inflation rate are in the 2.9-3.0% range.
Conclusions are difficult to come by in this environment. At this point, it seems likely that interest rates will stay higher longer than we thought six months ago. Investors were hoping to hear that the Fed was finished raising interest rates and were disappointed to hear that there may be further rate hikes. Consumers, on the other hand, largely shrugged off this news and have continued spending, even as they expect a slowing economy. The housing market, likewise, is rising as if interest rates are low with no end in sight.
The future will definitely become clearer when interest rates come down, inflation drops, and market valuations are lower. At this time, we think a recession is more likely than not, but will probably be mild. But, it will all depend on the success of the Fed in slowing the economy without causing a deep recession. Time will tell.
Wabash Capital
