“The only thing I know, is that I know nothing” – Socrates
I’m back in the office and although I’ve been aware lot has taken place for the time being I’ll continue spending the most time avoiding the narratives of the experts and just focusing on the tangible technical's. From the viewpoint of casual observation, the most I can say about the decline the broad indexes have experienced recently is there is always a good reason to be a little skeptic until the overall condition of the markets are oversold, which is where we find ourselves today and hence the scent of correction is beginning to take hold and it feels like a good time to pay attention and move slowly.
In the past month the Fed has made some comments that were construed to be aggressive. Battling inflation is no joke and I’m old enough to remember when the Fed Funds rate was over 10% designed to bring the economy down and inflation with it. Flash forward to today, the same rate is 1%, and we’ve gotten mixed economic and inflation data that suggests a peak in inflation may be closer than we think. Why am I saying this? Because the markets appear to be responding to the algorithmic narrative of the end of global economic growth as we see it. Hence, the markets keep experiencing weakness that, in my opinion, has more to do with no buyers than too many sellers. Don’t get me wrong, I still see the broad indexes caught between improving short term technical conditions that could set the stage for a corrective rally in stocks, but without the recovery of the long term technicals, the positive price activity, in my opinion, will likely not be enough.
The economic data over the past week and half has been in line with the mixed data that brought the first quarter GDP to negative. The ISM Non-Manufacturing Index and Nonfarm Productivity data both showed slowing activity. This led to an increase in economic forecasts of impending recession. However, the next piece of data last week were the Consumer Price index (CPI) and the Producer Price Index (PPI) which came out plus 0.3% and 0.5% respectively. The numbers were less than previous month over month numbers suggesting that inflation pressure might be peaking. However, the same economist forecasts expected more, therefore any good news was off the table. New data this week saw a comfortable increase in Retail Sales which rose .09% in April. However, upon closer look much of the increase was in building materials, autos and gas, non-store retailers, restaurants and bars all pretty much expected and to some degree suggests some opening of supply disruption are occurring. This is likely to keep the Fed on track to focus aggressively on Inflation, but with the stronger dollar on their side, any additional positive data coming out of the inflation indexes would be market positive.
The battle over inflation, what is, where it originates and how to fix it are the main topics of economic concern. Partly because inflation can be felt by most Americans, and not just at the gas station. The problem with navigating the narrative is that it seems to forget one small feature of the kind of inflation we are experiencing. Namely, in my opinion, that the inflation indicators are could likely peak in 2022, although how long they take to come down is less important. This is because the price increases that have been experienced in everyday life, are likely here to stay whether or not the inflation indicators decline. Various industries have had a tough time coming through the pandemic and the replenishment of balance sheets is not something they’re going to give up easily. For this reason, there is substance to the predictions of a coming recession, but for now, the likelihood of some surprises coming from future corporate earnings and a slow and steady retreat from the economy and employment, recession is still a way off, perhaps not until 2023. In the meantime, the markets can see some continued recovery, including volatility, and welcome careful focus on opportunities. And while the worst of the recent decline may be behind us, the potential for a strong rebound is still a bit hazy.