- June 1, 2022
-- After seven consecutive weeks of declines, the longest losing streak since 2001, equity markets logged strong gains last week. Selling exhaustion, positive retail earnings reports, and hints of Fed flexibility all helped the S&P 500 rebound from its lowest in more than a year1
. The latest economic and earnings data were mixed but, in our view, managed to challenge the prevailing view that the economy is on a one-way road to recession. While growth is slowing, there are plenty of counterpoints to the narrative that the expansion is nearing its end, which suggests that the pendulum might have swung too far to the pessimistic side. Here's is what we learned last week about three key variables that help shape market outcomes.1. State of the consumer
2. Fed policy
- Prevailing narrative: Consumer spending is buckling under the weight of inflation.
- Counterpoint (the good news): Overall demand remains resilient despite macroeconomic headwinds. The earnings disappointments from some retailers were mostly tied to cost pressures rather than weakness in consumer spending.
Adjusted for inflation, consumption increased in April at its fastest pace in three months, supported by solid job growth and accumulated savings. While a lowered outlook from retail giants Target and Walmart sparked a sell-off in consumer stocks two weeks ago, last week's upbeat forecasts from Macy's, Nordstrom and Ralph Lauren, together with April's spending data, bolstered confidence in the economy.
- Prevailing narrative: The Fed will tighten until the U.S. economy enters a recession.
- Counterpoint (the good news): The Fed may be more flexible than feared after two likely outsized rate hikes in June and July.
The No. 1 concern for investors is that the Fed will increase rates too far, pushing the economy into a recession. The release of the minutes from the May Fed meeting provided some relief to the markets.
Source: 1. Bloomberg
- Prevailing narrative: High inflation is here to stay.
- Counterpoint (the good news): The Fed's preferred measure of inflation slowed in April from March, and market-based inflation expectations have declined from their peak, fully reversing this year's spike.
The four-decade-high inflation keeps the pressure on the Fed to act. While the annual rate of price increases appears to have crested, there is little evidence that it will fall back to the Fed's 2% target anytime soon. However, there has been a notable drop in inflation expectations derived from the bond market. The five- and 10-year expectations (what market participants expect inflation to be in the next five and 10 years, on average) have declined the most over the past month since the start of the pandemic1.