Market Update

Equities

Stocks had a great week. The market seemed to like Powell’s acknowledgement of the possibility of a recession, if only because it might mean less aggressive rate increases in the future.

The market seems to be interpreting recent signs of slowing growth as a reason for the Fed to potentially be less aggressive. The thinking really seems to be that we can avoid a recession.

Investors now see a lower peak in the path of the Fed funds rate. They see the peak as between 3.25% and 3.50%. They expect the Fed to start cutting rates roughly one year from now.

Highlights

Individual investors bought a net $24B of US stocks over the past month, in line with the average of the past two years.
As of Tuesday, the average retail portfolio was down 32% from its previous peak.
Commodity prices are down. The CRB index is down 9.4% in the past ten days. Copper is down 16% in three weeks. WTIC is down 11.87% in the past 11 days.

The Economy

Forecasters raised the probability of recession due to higher borrowing costs, a blistering pace of inflation, supply chain problems, and commodity price shocks. They don’t believe that the Fed can raise rates without raising unemployment.

Head counts at companies with fewer than 50 employees declined in three of the past four months, even as employment at larger firms continued to grow. Small firms are struggling to keep pace with the higher wages offered by larger employers.

On the bright side, Federal Reserve data show that US households held $17.9T in cash at the end of Q1. At the end of 2020 Q1, this was $13.7T. Even after adjusting for inflation, US households had never experienced this type of increase before.

Highlights

63% of small business owners say that hiring challenges are affecting their ability to operate at full capacity.
- 77% said that they had boosted wages; 44% said that they added benefits
- The growth of remote work has made it easier for large employers to poach workers in faraway locations where the pay scales may be lower.
Container ships move more than 70% of the world’s manufactured goods.
- Shipping prices have cooled in recent months as some U.S. importers temper merchandise purchase orders due to high inventory levels and uncertainty about consumer spending.
- Inbound container volumes across the 10 largest U.S. ports have fallen by an average of 25% since May.
The housing market is being hurt by higher rates + prices that appreciated too quickly.
- Household balance sheets are much stronger. Mortgage debt is 65% of household income, vs nearly 100% in 2007.
- The problem that we’re seeing now is that prices simply went up too fast. By Q1, the increase in American home prices was 37% over the previous two years. This is the fastest on record.

The Economy

Whether we will have a soft or hard landing depends on whether we can reduce job vacancies without increasing unemployment. Everyone is a hawk now – realizing that we have to raise rates. The question is whether you are an optimist or a pessimist about the outcome (soft or hard landing).

Highlights

Fed Chair Powell said that we need to end inflation and that means raising rates (even if it causes a recession).
- He said that it is certainly possible that higher rates could push us into recession.
Larry Summers says that the U.S. will need five years of unemployment at 6% to contain inflation or two years at 7.5%, or one year at 10%.
St. Louis Fed President James Bullard said that the economy is on track to continue to expand this year. He also said that the Fed must meet market expectations for rate increases as part of its effort to rein in inflation.