When the day just keeps getting worse
When the day just keeps getting worse
What the Market? - Aug 22, 2022
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What the Market?
Mr. Market may be more tired of answering recession questions than Scarlett Johansson is of shutting down sexist journalists. After weeks of recession chatter and a slew of economic data, Mr. Market is still trying to find his bearings. Inflation is still high, the Fed is sticking to its hawkish monetary policy approach, and supply chain bottlenecks are still present. Despite all of that, it’s been quite the rally for equity markets since June (despite losing ground last week) and some are hopeful it may be the beginning of the end of the bear market. Recent inflation and consumer data suggest that it is highly unlikely, and after-all a bit too early to call. The Fed’s Jackson Hole Symposium and PCE release will lead markets in the week ahead.
What’s driving the market?
When your partner is ignoring the safe-word: The Fed reiterated their commitment to further hawkish policy despite early signs of cooling inflation pressures. Mr. Market thought it was going to be over, because he tanked on the news. Starting on Thursday, the Fed will be meeting with finance ministers from around the globe to discuss monetary policy, and inflation. The Jackson Hole meeting titled, “Reassessing Constraints on the Economy and Policy” will focus on interest rates, and a soft cooling of the economy to curtail inflation.
When you come in 2nd place but your dad is still disappointed in you: July’s retail sales report wasn’t great, but there was a silver lining. While sales came in flat MoM, underlying data showed that retail sales excluding auto and gas were actually up .7%MoM. The message is that consumers are still willing to make discretionary purchases rather than putting it under their mattress (recessionary behavior). Keep in mind, personal consumption makes up roughly 70% of our GDP and this marked the seventh consecutive month of retail sales growth excluding auto and gas. Despite the sliver of good news, consumer sentiment has dropped below 2008 levels. The UM consumer sentiment index came in at its lowest point on record last month, driven mainly by inflation that puts serious pressure on consumers’ pockets at the pump and grocery stores combined with higher borrowing costs.
Jobs Market is still doing well: The US labor market added a whopping 528k jobs last month (vs. expected +250k), more than doubling market expectations as the unemployment rate fell to 3.5% (the lowest since 1969). Both figures officially hit pre-pandemic levels. This marks what we would call the official full recovery of the labor market. Pandemic, over? Since April 2020, the US economy has added 22 million jobs, and private sector jobs are almost 1 million above what they were before the pandemic, which to us, is GREAT news. Moreover, wages rose 0.5%, accelerating from 0.4% the month before, and accumulating a 5.2% gain over the past 12 months. The figure remains well below inflation levels meaning a decline in real wages and thus a decline in purchasing power. The other piece of not so great news is that the labor participation rate (% of the population employed or looking for a job) sits at 62.1% and declining (63.4% pre-pandemic), meaning peeps are getting discouraged about finding a job, and part of the reason why the unemployment rate is as low as it is right meow. Initial jobless claims last week suggested that July is still coming in strong, and zeroing in on “effective peak employment”. Reaching the natural rate of unemployment typically bolsters wages as employers compete for the limited number of unemployed peeps.
What’s next? Although this is good news for the economy overall, it may not be the best news for the Fed (and certain financial markets). The Fed, trying to cool down the economy, may need to continue and (accelerate) tightening monetary policy (i.e. raising interest rates) to ease inflation. Mr. Market was expecting an ease of monetary policy tightening going forward but the better-than-expected jobs data may suggest that the Fed still has a few aggressive hikes ahead before slowing down. The good news is that the Fed has another jobs report and a couple of inflation reports before having to make a decision, so hang on tight.
What’s an investor to do?
Portfolio Management
Due to the forward-looking nature of financial markets, bear markets end a few months before the end of a recession. That is great news for investors. However, we still haven’t officially declared a recession, so let’s not get ahead of ourselves. As we await the NBER to call it the R word, this would be the first time since 1947 that 2 consecutive quarters of economic decline would not be a recession.
For now, and as we have been doing for the past semester, we continue suggesting the same long-term strategic thinking towards portfolio management. Patience will continue being a key factor moving forward.
Investment strategy: Based on your risk appetite, consider a smoothie of the following ideas:
Lean into Defensive / Flight to quality: more value stocks, consumer defensive, commodities, corporate bonds with short durations and even inflation-linked bonds.
Consider re-entering the market cautiously: Consider re-entering into long-term positions that may be flirting with historical lows due to the macro context. Proceed with caution and know what you are buying.
Research: This is the time to start looking beyond the slowdown and formulating your strategy of what sectors and companies are going to thrive once we’re on the other side. What companies are way too undervalued and weathering the storm?
Keep an eye on the economy
Keep an eye on the upcoming earnings releases from consumer companies, and the personal consumption expenditures report (PCE). We are looking to see how consumers are behaving to understand if people are behaving in a recessionary manner. The PCE is also the Fed’s preferred measure for inflation and is expected to decelerate slightly, with core PCE going to 4.7% vs 4.8% in June.
See here for the full economic calendar
The Curious Investor
Some more on China’s real estate fraud that’s causing a bank run
Surprise, surprise, China ain’t happy about the “discriminatory” nature of the US chips bill
Upcoming Earnings:
There are a TON of companies reporting this week, this list is only a clip. For a full list see here.
Consumer Discretionary: Macy’s, Nordstrom, Peloton, Dollar General
Travel / Hospitality: Advance Auto Parts
Financial Services: Affirm
Tech: Zoom, Intuit, Salesforce, Snowflake, Nvidia, Splunk, Dell, VMware
Join our Slack Channel for free access to additional earnings coverage:
What we’re vibing:
Q: Into the Storm: A must-watch documentary by every American citizen. Cullen Hoback has been researching the origins of “Q-Anon” years before the 2021 attack on the Capitol. See how the conspiracy theories came into existence and were fueled across the internet and by politicians to capitalize on the movement. A horrifying view into how easily society can be manipulated, and even a United States President.
Navalny: A riveting documentary covering the Kremlin’s attempted assassination of Alexia Navalny, Putin’s greatest political opponent in Russia. Navalny gained such a strong anti-corruption following that Putin won’t even say his name on television, referring to him as a “he who should not be named.” A nerve-gripping view into one man’s fight against an authoritarian regime.
Resources
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