Although the stock market has suffered immensely from higher interest rates, there are now signs that inflation has peaked and is beginning to recede. The backup in container ships at ports has ended and container rates have returned to pre-pandemic levels. Lumber prices have returned to normal. Oil, gasoline, natural gas and commodities prices are returning to normal. Gold and precious metals prices have been falling most of this year. However, despite dramatic increases in mortgage interest rates, the housing market has slowed significantly and, somewhat surprisingly, has been modestly resilient. The largest component of economic growth, consumer spending thus far remains unfazed and together with the retail industries are contributing to the on-going stability of employment and jobs market. Consumer spending and the services industries have proven to be sufficiently steady to contribute to inflations stubbornly high levels.
Given the above, and despite inflation’s slow retreat, there is some optimism for the Fed to start to curtail its interest rate regime and to stand back a bit to evaluate the effects of its program thus far. The forward looking recession indicators, at most, seem to be forecasting a short and mild recession if at all. But there may be too much political pressure forcing the Fed to remain proactive and aggressive thereby risking a deeper recession by not easing up until after inflation has fully retreated.
There are still many other risks to the economy and the stock market. The outcome of the war in Ukraine is far from certain and includes risks that it may become entrenched or worse, may expand. Yes, arms manufacturers are thriving, but highly unpredictable outcomes from armed conflicts are never positive for global long-term capital and financial investments.
As we’ve noted many times before that the stock market is the single most reliable leading indicator of future growth. It finally seems to be establishing a solid bottom while showing signs of an upward trend. Although difficult to detect a trend in high daily volatility, an upward trend is emerging and it is confirming that any recession next year will be relatively mild. If in coming weeks or months the Fed softens its interest rate stance, the market will respond very well. A rapid rise in the market at present seems unlikely and in these circumstances a firming of a solid base together with a slow upward trend seems likely.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Joe Toronto
Affiliated Investment Advisors 