I had a radio interview this week.
I don’t do these things often because it’s easier and more comfortable to talk about podcasts, but this sent me up front a great list of questions I liked.
Below are the 6 best questions with some thoughts on each.
(1) What is your reaction to the latest consumer price index report and inflation outlook?
Inflation was essentially flat from June to July.1
This is the first good news we’ve gotten on the price front in a while.
Inflation of 8.5% over the past 12 months is still uncomfortably high, but even if prices continue to fall in the coming months, it will take some time to stabilize.
Clearly, no single data point forms a trend, but the Fed’s move and some easing in the supply chain appear to be helping to stem the persistent rally in prices.
Gas prices have fallen for 60 days in a row. Crude oil prices fell. Used car prices are finally dropping.
You can (hopefully) build on this.
(2) Where will the Fed go from here?
Without knowing what the next few months of inflation data will look like, it’s hard to know exactly what the Fed will do.
In the summer of 2020, the Fed said it was fine with inflation continuing for a while if it meant a stronger labor market recovery.
The labor market is certainly in better shape than in 2020, but inflation is just above the 2% target.
Fed officials say rate hikes aren’t over yet, and I tend to believe that (for now).
Minneapolis Federal Reserve Governor Neil Kashkari on Wednesday stuck to his view that the U.S. central bank will need to raise its policy rate by another 1.5 percentage points this year and even more in 2023, even if it triggers a recession. said to do.
At the Aspen Idea Conference, Kashkari said the Fed was “far from declaring victory” on inflation despite “welcome” news that inflation may have started to decline.
Kashkari said he “sees nothing to change” the need to raise the Fed’s policy rate to 3.9% by the end of the year and 4.4% by the end of 2023. Interest rates are currently in the range of 2.25% to 2.5%.
The Fed took too long to act and doesn’t want to be ridiculed again.
They are now focusing more on inflation than on the job market, so they may continue to raise rates until they see a few drops in inflation.
Going too far should be a risk to both the stock market and the economy.
(3) What does a soft landing look like?
Let’s start with what a hard landing looks like and work backwards.
A few months ago, I looked at what happened to unemployment during past recessions.
The average lift is more than doubled from the low. That would push the unemployment rate above 7% from the current 3.5%.
For me, a soft landing would be inflation below 4% or so, without a commensurate rise in unemployment.
If we can get inflation back to around 3%, I think anything with unemployment below 5% is good.
What are the scenarios where this can be achieved?
The labor market is in a strange situation right now. Because there are more jobs available than people looking for work.
These openings decreased slightly from 11.7 million to 10.7 million. In a dream soft-landing scenario for the Federal Reserve, these openings would see him fall by 4 to 5 million jobs, but the unemployment rate would not rise much above 4 to 5%.
Is this actually possible?
Employers have been dealing with a difficult job market since the pandemic began, although history says otherwise.
Sam Ro wrote a thought-provoking article this week about the concept of labor hoarding worth considering.
So what is the reason for the current reluctance to cut workers?
It may be related to recent experience.
Much of the ongoing economic recovery is due to persistent labor shortages. Employers are not hiring fast enough to keep up with the surging demand for their goods and services.
At least some employers, seeing the current downturn in business, remember how difficult it was to recruit in the past two years, and are willing to stick with their employees, even if there are maintenance costs involved. I hope
As a matter of convenience, it’s easier to cling to workers during a slowdown or recession if the recession is expected to be short and shallow.
Millions of people were laid off or shelved in 2020, making it more difficult to rehire if demand picked up faster than businesses were accustomed to.
Assuming the next recession is milder, what if employers continue to hire more workers than they did during past recessions?
What if a company doesn’t want to redo their hiring process after a recession?
If the Fed cuts economic activity significantly to keep inflation in check, this is probably the best case scenario for a soft landing.
(4) What is your general outlook on the market and/or recession?
I would like to have a good answer on this matter. I don’t
While the stock market is hitting all-time highs, we could be in for a recession.
Or even if the economy does get better from here, the stock market could crash.
Sometimes these things don’t make sense.
My macro outlook has never been so helpful to my portfolio.
Sometimes my thoughts on the economy and markets have been helpful. There have also been times when my thoughts on the economy/markets have destroyed my portfolio.
Here’s a little investing secret the pros will never admit — you don’t have to predict the future to be successful in the market.
As long as you have a reasonable investment plan in place, prospects are almost always more beneficial to your ego than performance.
(5) What can we learn from this recession?
Since early 2020, the US stock market has fallen 34%, rose 120%, dropped 24% and is now up nearly 17%.
In less than three years, I feel like I’ve lived through every cycle imaginable: 1918, 1929, 1999, 1970s, maybe the 1960s, and maybe other similarities I’m overlooking.
all The market is cyclical.
Things are always happening that have never happened before.
The biggest risks are always the things you don’t think about or prepare for.
(6) Has the market bottomed out?
I tried this out a few weeks ago and the market has gone up even more since then.
If inflation continues to improve and there are no external shocks to the system, I wouldn’t be surprised to see new highs by 2023 (earlier than that?).
But the risk of Fed policy mistakes is probably higher than ever, so I wouldn’t be surprised to see more volatility in the coming months.
If it was the bottom, it would feel obvious once we knew for sure.
If the stock rolls over again, that’s also clear.
That’s the market we’re in.
If the stock falls further, it could present a good opportunity to rebalance the pain.
If the stock continues to rise, you should wait for the next correction and buy at a lower price.
Bottom or not, volatility is a hallmark of the stock market and will come back at some point.
References:
Every Time Out it’s a Guess
1It was technically 0.02% lower, but I don’t like decimals in economic data.