July 28, 2022

Things will Change

 This week has seen a lot of buying, which is not surprising since the current correction is nearly overbought (and human nature is too often to buy high and sell low). I’m also not surprised by the modest change in investor sentiment. But I also don’t want to be cynical about the real events that data is providing, showing some economic slowdown. I accept the value of the data and the message it sends, it’s the markets I’m a little skeptical about maybe, but that’s why a good question to ask about the past two weeks of market activity is, how did we get here?


The markets opened the week after a strong finish last week, only to trade lower in anticipation of yesterday’s Fed rate hike (1.75% to 2.5%). However, coming into today the broad indexes, Dow Jones, S&P 500 and NASDAQ, have added 2.0%, 2.8% and 2.8% respectively, all adding to an increasingly overbought condition. From a technical view, the said indexes also saw a constructive move with prices going above their 50day moving average. This is a good start suggesting real buying is taking place and not just Pindudes and Algochums. But for now, the longer term averages remain in their own negative state, suggesting it’s too early to call an end to the bear market, but worthy of paying close attention.


I’ve always said that I know when I’m in a recession when it nears an end. Privileged perhaps, but I always find the reality of a bear market is easier to recognize than a recession. The current bear market officially began March 2022, but the signs were there, presented by both the rising interest rate market and the unpleasant growth in inflation. Both messages were also followed by what I’ve referred to as choppy economic data. In the first quarter production declined, housing was moderating and the consumer still had the appetite to buy, but was little less hungry. In the end, the first quarter measured a negative -1.6% GDP thereby revealing that the declines outweighed the increases in growth leaving the second quarter to confirm both the bear market and the aggressive Fed activity, but not the recession, yet. Second quarter GDP data came in today showing a decline in growth of -0.9%. Economists were forecasting a lower number, and the markets are continuing to rally. But in my opinion, a negative GDP is a negative GDP regardless of those narratives that may disagree. Yesterday, the Fed increased the interest rate that tracks the transactions between depository institutions (banks), an anticipated 0.75%. In his customary remarks, Fed Chairman Powell also provided guidance that clearly focused on the moderating economy, suggesting the continued aggressive posture might have to reconsider on a data by data basis. They won’t meet again until September, and in the meantime the broad indexes can give up some of their recent gains as easily as they may continue higher. In my opinion, the picture is getting clearer, and I’m okay with that.

External Events

It's always worth pointing out that every shift from bear to bull market over the last four decades of recessions, has occurred before the recession officially ends. As far as when recession begins, the familiar uncertainties have added to some of supply constraints in the EU that were exacerbated by the recent data showing that Germany, the EU’s largest economy, may already be in recession. That could be made more difficult to navigate as the EU has also been slow to battle inflation, and their dependence on Russia for natural gas poses uncertain risks. Also, rarely discussed is the impact of Fed raising rates on the relative value of the US Dollar. The strong dollar has the dual effect on both companies doing business internationally and the challenges to domestic exports. Over time, in my opinion, the dollar will resume its longer term decline in relative value, but in the meantime, it’s effect on the global economy isn’t to be ignored. All of this is what keeps us tactically invested, ready to act constructively when, or if we enter a recession, modest or otherwise, that will likely first be recognized by the voting members of the Federal Reserve Board. When that happens, things will change, and for the better.

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