- John M West III, MBA, CFP®
Macroeconomic View & Markets
The U.S. economy continues to be quite strong, but there are signs the anticipated slowdown is emerging. Overall, the economic data has been positive, but fears of an immediate recession were front and center throughout the quarter. Low unemployment and a looming recession? It feels like a juxtaposition to many. All this while the Fed is trying to softly land the economy by killing inflation through higher interest rates. A detailed look at the macroeconomic landscape requires a looking glass over several key data points. As you may recall from our May letter, we alluded to a handful of reasons as to why we weren’t already in a recession, which are outlined below.
The jobs market continues to be robust. The unemployment rate remains near an all-time low at 3.6%. Over the past year, at least 400,000 jobs were added each month. There continues to be over 11.25 million open jobs, or nearly two jobs for every available worker. This is down from 11.9 million in March. Total employment stood at 151.98 million, which is barely below its pre-pandemic level of 152.504 million in February 2020. The layoff rate of 0.9% from May is near a historic low.
Initial jobless claims (newly unemployed) were 235,000 for the week ending July 2nd. Continuing jobless claims (long-term unemployed) were 1.38M for the week ending June 25th. The claims numbers continue to be near historic lows. However, they are slowly rising after bottoming out in April.
In May, the Consumer Price Index increased 8.6%, marking the highest reading since December 1981. The Federal Reserve raised the Fed Funds rate by 50 basis points in May and 75 basis points in June as inflation continues to be significantly above the target. The Fed is raising rates to slow down the economy, which should help curb inflation. They will likely continue to hike rates throughout the year as inflation remains persistent at historically high levels.
The Fed’s preferred price index is the Core Personal Consumption Expenditures Price Index, which excludes food and energy (oil & gas) since they tend to be much more volatile. This index has been trending down throughout the year and is now at 4.7% (May), which is the lowest it has been in six months, after peaking at 5.3% in February. Oil prices have fallen to four-month lows. Housing, commodities, and freight prices are all coming down significantly, with many prices dropping below pre-Ukraine war levels.
Even though the jobs market continues to be strong, we are starting to see a slowdown in segments of the economy specifically-related to consumer spending. Housing data has slowed due to rate hikes, which caused mortgage rates to rise near 6%. As a result, existing-home sales declined 3.4% in May as homes are sitting on the market longer and list prices are being reduced to entice buyers. A slowdown does not mean a crash like what happened during the global financial crisis of 2007 - 2008. Retail sales in May were also negative, showing a drop of 0.3%.
While there are signs that portions of the inflation story are starting to wane, so is economic growth. The Gross Domestic Product for the first quarter was -1.6% and as of last week, turned negative for the second quarter, according to the Atlanta Fed GDPNow estimate. However, this does not necessarily mean that we are in a recession. As Susan discusses, NBER measures various factors before they declare a recession: hiring, unemployment, manufacturing, and income. Currently, all of these continue to be strong. A recession is not called until they see a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” (nber.org, Business Cycle Dating Procedure) Nevertheless, the economic picture is changing quickly. We remain vigilant.
The markets always move ahead of the economy and usually overreact. As a result, the S&P 500 was down 20% YTD, suffering its worst first half of a year since 1970. The iShares Core US. Aggregate bond index was down over 10%, posting the worst start to a year in its history. Throughout the year, cash has been the only positive asset class. Both bonds and broad stocks have sold off since early January as many equity markets entered a bear market for the first time since early 2020.
Fixed Income: cash led for the quarter, 1-year, and 3- years, while high yield corporates led in all other periods. The U.S. Aggregate Bond Index was the laggard for the quarter, 1, 3, and 5-years, while cash was the worst performer for the past 10 and 15-years.
Equities: real estate led for the quarter, while large-cap led in all other time periods. Small U.S. stocks were the worst performer for the quarter and 1-year, while foreign was the laggard in all other time periods.
As discussed in Facts and Advice, since 1928 the number of bull and bear markets is almost evenly split. However, bull markets represent approximately 78% of the time. Over time stocks go up. For now, the investment outlook is uncertain.
Selloffs as we have experienced since January represent opportunities for long-term investors. Bear markets are never pleasant, but they always end and eventually result in new highs. In the meantime, we will remain patient and defensively positioned until there is more clarity on inflation, interest rates, corporate profits, and a potential recession.