June 16, 2022

Nice Guys Finish Last

 The Fed raised interest rates yesterday and I’ve made the statement over the past week, that the Capital Markets would respond better if the Fed were too aggressive than if they weren’t aggressive enough. Well, the Fed, as expected, raised rates by .75%, and the market response could best be described as ambivalent. Then Fed Chairman Powell took the stand to take questions and suggested a more aggressive stand as the data comes in to defend the move. This seemed at odds with his statements that the economy was strong and his statement that the goal of the Fed is strong employment. Unfortunately, strong employment is exactly what helped create too much money now faced with too little to buy, which is by definition, inflation. Does Powell mean any of it? It doesn’t matter. As once observed, inflation doesn’t like nice guys, so yesterday Powell tried to show us his tough side. But was it enough?

On the issue of economic growth, strong is not what I’ve been commenting on for at last four months. First of all, one needn’t look far to see that the first quarter of 2022, real GDP came in at an annual rate of negative 1.5%. During the present quarter the ISM Non-Manufacturing index slowed to 55.9, above or below 50 implies expanding or contracting, New Single-Family Home Sales dropped -16.6% in April, Retail Sales Declined- 0.3% in May and as has been typical of the past three months, manufacturing activity has improved since the first quarter, adding to the economic uncertainty that, in my opinion, may be promising to some, but is not a strong economy.

One area that has been resistant to economic moderation has been job growth. Since the challenges faced by the pandemic the vast number of companies that are committed to the new approach, namely providing jobs and community support, and showing it with a hike in wages that has exceeded 5.5% over the past year. However, companies are facing two historical issues right now. Consumer reticence is real, institutional retail entities have found themselves with too much inventory and declining consumer interest. With the need to address these issues on the balance sheet (i.e., bring operating expenses down) the first place most companies will look at are employment costs, which are showing up in casually announced layoffs and hiring freezes. Personally, I like the current pace of executive retirements taking place in the technology sector. Afterall, when Sheryl Sandburg decided to leave Meta (META) her income alone is probably enough to save a few thousand blue collar jobs. 

The handful of times investor and market activity was so volatile, the word “conundrum” became the customary descriptive of the narrative. We still have supply chain disruptions from China, War that is fading from the media, and a dysfunctional OPEC that are all uncertainties on steroids, with little sign of being seriously addressed. There is no denying that even when inflation data peaks, tangible inflation has arrived and much of it will stick around. Only a meaningful economic slowdown, call it a recession will have the necessary influence on consumer activity. This may be because most people are smarter than our government experts take for granted. For now, the markets are very oversold and, in my opinion, it's not a time to sell, but any buying still requires careful consideration. 

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