Special Market Update - Recession Fears Abate

WT Wealth Management - August 2023 Special Market Update

Over the last several weeks we have seen renewed enthusiasm within the equity markets as Wall Street investors embrace the prospect of a "soft landing" or "no landing" recession within the U.S. economy.

Stocks and bonds have rallied since mid-spring as inflation pressures eased more quickly than anticipated. Reports on July 12th and 13th showed better-than-expected consumer (CPI) and producer-price (PPI) inflation reports, which have lifted hopes that U.S. inflation can be returned to a normal range without triggering a recession. Many economists and Wall Street observers predict that U.S. headline CPI will dip below 3% by early fall, with core measures of inflation falling within the Federal Reserve (Fed)'s 2% target by this time next year.

Restrictive monetary policy (increasing interest rates and shrinking the balance sheet) has long been a tactic used by the Fed to rein in inflation, but restrictive monetary policy comes at a cost. Will the Fed's actions kill the U.S. economy, the housing market and millions of jobs? So far, they haven't. The combined 525 bps (5.25%) of Fed Funds Rate increases has not delivered significant pain to the broader economy despite the Fed's warning a year ago to expect plenty of discomfort, particularly in interest rate sensitive areas (e.g. mortgages, credit card debt, auto loans, etc.).⁽¹⁾

FOMC Meeting Date	Rate Change (bps)	Federal Funds Rate
July 26, 2023	25	5.25% to 5.50%
May 3, 2023	25	5.00% to 5.25%
March 22, 2023	25	4.75% to 5.00%
Feb 1, 2023	25	4.50% to 4.75%
Dec 14, 2022	50	4.25% to 4.50%
Nov 2, 2022	75	3.75% to 4.00%
Sept 21, 2022	75	3.00% to 3.25%
July 27, 2022	75	2.25% to 2.50%
June 16, 2022	75	1.50% to 1.75%
May 5, 2022	50	0.75% to 1.00%
March 17, 2022	25	0.25% to 0.50%

https://www.forbes.com/advisor/investing/fed-funds-rate-history/

The latest economic releases encompassing Gross Domestic Product (GDP), inflation and job reports have eliminated most Wall Street economists' calls for an imminent US recession. In fact, Goldman Sachs recently revised their recession expectations down to a 20% chance in the next 12 months.⁽²⁾ We have also seen several Wall Street analysts set mid-year 2024 price targets of 5,000 on the S&P 500 (just shy of 10% above its level at the time of this writing and nearly 40% above its mid-October 2022 low). The current economy continues to surprise even the most ardent bears as the labor market, consumer spending (particularly on services) and residential housing have shown signs of strength over the last several months.

At WT Wealth Management, we feel several factors help explain the economy's refusal to fall into recession. Among them are steadfast consumer spending fueled by full employment, a willingness to spend and "live your best life" and record levels of home equity that history has shown lifts consumer confidence.

While so far it appears that the Fed has managed to successfully strike a balance between easing inflation pressure and maintaining economic growth, is a soft or no-landing recession outcome guaranteed? Not necessarily. Many things can still happen.

I like to joke with the team at WT Wealth Management that the bus you see isn't the bus that gets you, it's the one you don't see. While some recessionary harbingers still lurk in the data (e.g. inverted yield curve, record level of consumer credit card debt, steep decline in the Leading Economic Index, etc.), other data show a U.S. economy that is considerably stronger than many economists thought possible 12 months ago when the Fed began what has become the most restrictive monetary policy regime since the early 1980s.

There is rarely consensus on Wall Street, for it is differing opinions that make markets, but most agree that the Fed is on the brink of ending their tightening campaign. Inflation is finally succumbing to tighter economic conditions and reacting as most economists expect. When the story is finally written, the U.S. economy may be remembered as more resilient to higher interest rates than many thought possible. The post-Covid world is littered with surprises and maybe, just maybe, this is the biggest surprise of them all.

Sources

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