• Parts of the US economy may have stalled, but employment was holding up well and consumers had plenty of room to keep spending.
• Oh, and there was an eight-week hiatus between Federal Reserve meetings.
Of course, the scorching summer days turned out to be much busier than expected. The S&P 500 index has rebounded 17% since its low in June; meme and bitcoin stocks started to sizzle again; and even downtrodden homebuilders caught an updraft. Some attributed it to the illusion of a change in Fed messaging at Chairman Jerome Powell’s July 27 press conference. Others credited the resilience of earnings. And some have seen indications of a classic short squeeze.
Either way, it’s clear that summer’s price action can’t be trusted, as exemplified last week as the S&P 500 posted its biggest weekly decline since. on July 1, the fall being exacerbated by the expiration of $2 trillion in options. If the trajectory seemed uncertain in June, it is even more fragile in August, when equity prices are markedly richer but fundamentals – and fundamental uncertainty – have changed as little as everyone expected.
Consider the outlook for monetary policy. When Powell speaks in Jackson Hole on Friday, he may well be pushing back against the idea that he will soon end the tightening cycle and start cutting interest rates. This idea came to fruition after his July press conference and was responsible for boosting the nascent rally in the asset classes. Since then, however, the fed funds futures and bond markets have mostly returned to earth, while stocks have stubbornly held on to their gains. Fed funds futures fell from a December peak of around 3.25% to a March peak of around 3.75%, with cuts not expected to begin until late 2023, which seems more reasonable, although far from the most hawkish scenario. (The Bloomberg Economics team thinks the peak will be 5%).
Then there is the earnings outlook, the factor most likely to explain the divergence between stocks and Treasuries. The earnings season was marked by widespread resilience, and it is tempting to believe that it confirmed the thesis of a “soft landing” for the economy and businesses despite widespread concerns about the impact of the rise in interest rates. In fact, the verdict is far from being rendered. What investors often have on hand are numbers for the period ending in June — a quarter that saw a time-weighted average target federal funds rate of just 0.86% (based on the upper limit of the Fed). ). In July, the Fed hit an upper bound of 2.5%.
The effects of monetary policy are notoriously lagged by several quarters. Additionally, US consumers entered 2022 with particularly strong cash balances and ample borrowing capacity that they are only just beginning to tap into. These factors have considerably lengthened the trail on American consumption, but they do not prevent an unfortunate end. Corporate America has seen incredible per-share gains during the pandemic, and they still haven’t paid the price. We don’t yet know what kind of price they’ll pay, and analysts aren’t far off assuming a worst-case scenario.
Ultimately, the market narrative is far from settled. If the cooling of inflation is confirmed in the reports due in September and October, it would finally give Powell the “streak” of improvement reports he covets. This would give market bulls something concrete to hang their hats on. Of course, it may take even longer than that to properly assess whether the Fed increases are proving too big for the US consumer. Indeed, many economists still believe that a recession – if one occurs – would be a 2023 event. In any case, it is likely that the tasteless price action of summer 2022 will turn into a fake and that Team A traders should get back to work soon, as the market is about to get real again.
More other writers at Bloomberg Opinion:
• “Godfather” overview of market drivers: John Authers
• Stock market rebound has history on its side: Aaron Brown
• Don’t buy the Stock Rally? Smart Money Made: Robert Burgess
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.
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