Equity investors just endured the worst first six months of any year since 1970. This occurred despite a “Bear Market” rally in May. For the month, the S&P 500 was down -8.4% (see last column of table) as was the Russell 2000, with the Nasdaq down -8.7% and the DJIA -6.7%. All the indexes except the DJIA are in “Bear Markets” (see second from last column).
This isn’t any wonder. The incoming data has shown significant deterioration and major data revisions have all been to the downside.
The latest GDP revision for Q1 put the quarter deeper into negative territory at -1.6% (the initial estimate was -1.3% and the first revision was -1.5%). Worse, consumption, which has been the buoyancy for economic growth, was revised down to +1.8% for Q1 from +3.1%. That means a much weaker handoff from Q1 to Q2. And, given what we are seeing from the high frequency data, it looks very much to us that Q2 GDP growth will also be negative. The NY Fed’s model shows an 80% probability of a Recession, and the Fed’s Atlanta Reserve Bank’s GDPNow model puts Q2 GDP growth at -1%. If that is close, that would be two quarters in a row of negative GDP growth. While the National Bureau of Economic Research (NBER) is the final arbiter of recession start and end dates, the markets’ rule of thumb has always been two consecutive quarterly negative GDP growth prints. Thus, our view for the past few months (as discussed in this blog), that we were likely already in Recession, appears to be on the cusp of validation.
The Changing Narrative
Until mid-June, the financial markets were all about “Inflation, Inflation, Inflation.” Much of the everyday media still is. But, in mid-June, financial markets began to worry more about Recession than about Inflation. The chart above shows the peak in the 10-Yr Treasury Note yield at 3.48% on June 13. It closed Friday (July 1) at 2.89%, indicating that markets no longer think the Fed will enact the number and magnitude of rate hikes implied by its “forward guidance,” i.e., the latest “dot-plot.”
The Futures Market tells a similar story. On June 15, the implied Federal Funds Rate (the rate banks borrow and lend their excess reserves to each other overnight) for February 1, 2023, was 3.71%. On July 1, it had fallen to 3.34%, and 2.61% is currently the view for June 30, 2023.
MORE FOR YOU
Stocks This Week: Buy KLA Tencor And Starbucks
Fintech Stocks Continue To Lag The Market. Time To Buy?
What’s Next For BlackBerry Stock After A 4% Move Last Week?
There are very good reasons for this behavior in the bond and futures markets:
The economic outlook for business has rapidly deteriorated. The chart below is from the Philadelphia Fed and the data is for that district. Charts from the other regional Feds look similar. Note that the six-month forecast for new orders shows the lowest outlook on the chart (that’s since 2002).
There appears to be good reason why this index shows so much despair. We haven’t seen this level of inflation for about four decades. Thus, the majority of consumers have never had to deal with it. And, it also appears that the real level of inflation is much higher than the CPI implies. The fact is, even with rising wages, consumers have fallen way behind. Real average weekly earnings (i.e., adjusted for “official” inflation) have fallen -3.5% over the past year. Whenever that has happened in the past, a recession has ensued. This time is no different.
Equity investors just endured the worst first six months of any year since 1970. This occurred despite a “Bear Market” rally in May. For the month, the S&P 500 was down -8.4% (see last column of table) as was the Russell 2000, with the Nasdaq down -8.7% and the DJIA -6.7%. All the indexes except the DJIA are in “Bear Markets” (see second from last column).This isn’t any wonder. The incoming data has shown significant deterioration and major data revisions have all been to the downside.
The latest GDP revision for Q1 put the quarter deeper into negative territory at -1.6% (the initial estimate was -1.3% and the first revision was -1.5%). Worse, consumption, which has been the buoyancy for economic growth, was revised down to +1.8% for Q1 from +3.1%. That means a much weaker handoff from Q1 to Q2. And, given what we are seeing from the high frequency data, it looks very much to us that Q2 GDP growth will also be negative. The NY Fed’s model shows an 80% probability of a Recession, and the Fed’s Atlanta Reserve Bank’s GDPNow model puts Q2 GDP growth at -1%. If that is close, that would be two quarters in a row of negative GDP growth. While the National Bureau of Economic Research (NBER) is the final arbiter of recession start and end dates, the markets’ rule of thumb has always been two consecutive quarterly negative GDP growth prints. Thus, our view for the past few months (as discussed in this blog), that we were likely already in Recession, appears to be on the cusp of validation.
The Changing Narrative
Until mid-June, the financial markets were all about “Inflation, Inflation, Inflation.” Much of the everyday media still is. But, in mid-June, financial markets began to worry more about Recession than about Inflation. The chart above shows the peak in the 10-Yr Treasury Note yield at 3.48% on June 13. It closed Friday (July 1) at 2.89%, indicating that markets no longer think the Fed will enact the number and magnitude of rate hikes implied by its “forward guidance,” i.e., the latest “dot-plot.”
The Futures Market tells a similar story. On June 15, the implied Federal Funds Rate (the rate banks borrow and lend their excess reserves to each other overnight) for February 1, 2023, was 3.71%. On July 1, it had fallen to 3.34%, and 2.61% is currently the view for June 30, 2023.
MORE FOR YOU
Stocks This Week: Buy KLA Tencor And Starbucks
Fintech Stocks Continue To Lag The Market. Time To Buy?
What’s Next For BlackBerry Stock After A 4% Move Last Week?
There are very good reasons for this behavior in the bond and futures markets:
The economic outlook for business has rapidly deteriorated. The chart below is from the Philadelphia Fed and the data is for that district. Charts from the other regional Feds look similar. Note that the six-month forecast for new orders shows the lowest outlook on the chart (that’s since 2002).
There appears to be good reason why this index shows so much despair. We haven’t seen this level of inflation for about four decades. Thus, the majority of consumers have never had to deal with it. And, it also appears that the real level of inflation is much higher than the CPI implies. The fact is, even with rising wages, consumers have fallen way behind. Real average weekly earnings (i.e., adjusted for “official” inflation) have fallen -3.5% over the past year. Whenever that has happened in the past, a recession has ensued. This time is no different.