Inflation is rising, the stock market is collapsing, and consumers are more and more worried about their future. None of this is good, but maybe it’s time to hit the brakes a bit to worry that everything is falling apart. Recession fears are certainly on the rise, especially after the US already saw a quarter of negative economic growth following a 1.4% drop in first-quarter GDP. All you need is an extra command to send the economy into the general definition of a recession. But the job market is alive and well. Companies are on average filling more than half a million open positions per month in 2022, wages are rising – albeit not as fast as the cost of living – and companies are still profitable at a decent rate, posting a 9.1% profit gain in the first quarter, As estimated by FactSet. However, it is still the problem of inflation that has confused the markets the most. The good news is that once that starts to slow, it can increase both investor and consumer confidence. The bad news is that it can take some time, as in years. This is partly because there are multiple factors that influence c’s loss of the fastest price growth in more than 40 years. There are the lingering effects of massive fiscal and monetary stimulus, the supply chain buildup related to the pandemic, and the risks associated with the war in Ukraine. said Jim Poulsen, chief investment analyst at The Leuthold Group. “All of these separate concerns are one. They are all related to inflation, and that’s the key here.” Whether 8.3% inflation, and the attendant interest rate hikes from the Federal Reserve to curb it, are enough to bring the economy to its knees is a matter of intense debate now. Most Wall Street economists raise their forecasts for a recession, with Goldman Sachs forecasting a 1 in 3 chance, while Deutsche Bank, on the other hand, expects a sharp period of negative growth beginning in late 2023. A reliable New York gauge of Fed uses The Fed, which is comparing 10-year to 3-month Treasury yields, had a recession probability of just 3.7% at the end of April. Ed Heyman, chairman of Evercore ISI, recently said he thinks inflation has peaked, and hedge fund giant David Tepper at Appaloosa Management recently told CNBC that he is taking off his short position on the Nasdaq, whose voters are more vulnerable to higher interest rates. Still, persistent inflation is scaring investors enough to send the tech-focused Nasdaq into a bear market, and the S&P 500 and Dow Jones Industrial Average aren’t far behind. “The market is all about technical techniques and trying to find a bottom,” Paulsen said. “We need to see capitulation but there are those technical factors that keep breaking.” Paulsen sees a better fundamental picture than technical indicators suggest, mainly due to the strength of the household and corporate balance sheet. He’s also in camp, along with JPMorgan strategist Marko Kolanovic and others, as he saw inflation peaked in March. Household debt has risen steadily last year, topping an 8% increase in the fourth quarter to bring the total to nearly $16 trillion. However, as a share of disposable income, it’s only about 9.4%, half a percentage point lower than it was before the pandemic, according to Federal Reserve data. Also, corporate debt relative to GDP is lower than it was before Covid. Paulsen said investors should focus on long-term strength and invest accordingly. He points to frontier markets, emerging markets excluding China and the All Countries Except MSCI US index as places that could outperform the S&P 500. One way to play in frontier markets is through the iShares MSCI Frontier and Select EM ETF. One former China play is through the Columbia EM Core ex-China ETF. Trying to thread the needle… Finding both safety and superiority is a difficult chore with the cross currents that the market faces. The approach of Scott Knapp, chief market strategist at CUNA Mutual Group, tries to thread that needle by betting on a better future while dealing with the realities of the present. In a Knapp streak ‘sharp’ scenario, the Fed has to tighten hard to bring inflation down to its 2% target and in the process stifle growth and inflict more pain on the market. However, it does leave room for the significant possibility that inflation may react more quickly to higher interest rates and require less Fed tightening. ‘Change in [inflation] Expectations lead to price hikes in the markets which are likely to happen before people know it. Describing the latter scenario, he said, “A rally like this would be less respected than most rallies.” “People won’t believe it until it’s in the rearview mirror.” As such, Knapp recommends a portfolio in which investors take longer to risk, which is counterintuitive for an inflation scenario. At the same time, investors should maintain a strong commodity allocation but not overweight. “Investors need to think like options traders, rather than relying on unreliable expectations.” To assess the odds and invest accordingly across the spectrum, while still maintaining hedges against left-tailed events. That’s what options traders do, and they don’t rely on trying to predict the future. “…with a pair of boxing gloves” Those whose job is to look to the future see a potentially bleak picture. The Fed is trying to tame inflation without shattering growth, and history suggests that it is a difficult if not impossible task. Consumers aren’t convinced it can happen: Friday’s widely-watched University of Michigan confidence poll hits a 10-year low, with terms of purchase for long-term goods hitting the lowest reading in history dating back to 1978. Inflation expectations remained Next year is sunken at 5.4% and 3% for the next five to 10 years, both well above where the Fed feels comfortable. “We are trying to thread the needle into a pair of boxing gloves,” said Joseph Brusolas, chief US economist at RSM. [GDP growth] They will stagnate growth while declaring victory. This is a tough picture here. “Indeed, there is an echo being felt across multiple parts of the economy. The Cass Shipping Index for April showed a 0.6% drop in April volumes after a 0.5% increase in March, and the survey accompanying narration was after a nearly two-year cycle of rising freight volumes,” the report said. , the charging cycle regressed with an impact. The potential for a freight stagnation is now high, as substitution from goods to services picks up spending “the pace of growth, and as inflation slows in public spending, particularly through higher fuel prices and pressure on interest rates.” Brusuelas also acknowledges the probability of a recession over the next 12 months at around 33%, with the situation in Ukraine and the Covid lockdown in China It is interesting that Deutsche Bank, which has the most pessimistic outlook on the street, praised Federal Reserve Chairman Jerome Powell and his fellow central bankers for following them The right way on inflation, even with ‘he and his’ consequences [Federal Open Market Committee] Colleagues know that based on the traumatic experience of the 1970s and early 1980s, the faster the inflation problem is dealt with, the less expensive it will be to do so, and the faster the economy will return to its desired growth path,” the bank said in a note to clients. It’s easy, but the Fed is on the right track.”
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, May 13, 2022.
Brendan McDermid | Reuters
Inflation is rising, the stock market is collapsing, and consumers are more and more worried about their future. None of this is good, but maybe it’s time to hit the brakes a bit to worry that everything is falling apart.
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