Market Update

Markets

Investors have survived a bear market. They’ve survived the fastest pace of rate hikes in decades. Yet, one bad week, and doubt has crept back in. While inflation is improving, we have no idea where it will level off. We also have no idea of when the Fed will stop raising rates.

The outlook is highly uncertain. Inflation is showing signs of pulling back from its peak and businesses have been expanding payrolls at a strong pace. At the same time, Fed officials have signaled that they will continue to raise rates aggressively until consumer price increases are reined in.

Highlights

July was the first month in five years that no new SPACs raised money.
The Fed appears to be much more hawkish than is priced into the market.
JPM thinks that rate-sensitive stocks will continue to do well. They think that value will do well only after growth has bottomed out.
Morgan Stanley strategists said that the sharp rally since June is just a pause in the bear market, predicting that share prices will slide in the second half of the year as profits weaken, interest rates keep rising and the economy slows. JPM says that the rally could run through the end of the year.

Inflation

The Univ. of Michigan survey showed that short-term inflation expectations are receding while longer-terms ones are mounting. Both are too high and they’re likely to keep the Fed aggressive in its fight against rising prices.

Highlights

Respondents expect prices to rise 5% over the next year and 3% over the next 5 – 10 years.
Many surveys show that people have no idea about inflation. In the most recent survey, 15% of respondents thought prices would go up by 15% or more, while 8% predicted deflation.
We’re starting to see backups of dozens of container ships off ports in New York, Houston and Savannah, Georgia. There are ~20 ships waiting outside of NY and ~40 waiting outside Savannah. Houston has a backup of ~25 ships.
Importers are trying to avoid the West coast ports. The volume of loaded containers reaching NY and NJ rose 12% YoY in the first five months. It increased 24% in Houston.
Consumer prices at grocery stores increased 13.1% YoY in July, while prices at restaurants increased 7.6%. This is the biggest gap since the 1970s.

Labor

We need more workers. But, the labor force is ~600K smaller than early 2020. It’s several million smaller if you adjust for the increase in population. The Fed’s goal is to reduce demand for workers without raising unemployment. Stagnant labor supply could also constrain our long-term growth potential.

Highlights

American companies are on pace to reshore, or return to the US, nearly 350K jobs this year. That would be the highest number since we started tracking this in 2010.
Covid, Russia invading Ukraine, and China’s eventual invasion of Taiwan are all having an impact. Recent legislation has also provided tax breaks for reshoring.
According to Gallup, 54% of workers who were born after 1989 are classified as “not engaged” – they show up to work and do the minimum, but not much more. Many of these workers feel like their work has no purpose.
The idea of not taking your job too seriously (and not going above-and-beyond) is referred to as “quiet quitting.” It is the idea of keeping your job, but focusing on your life outside of work. Some say that the idea of quiet quitting is simply the idea of avoiding burnout.

The Fed

The recent combination of a stronger-than-expected jobs report and better-than- expected inflation numbers has reset the dominant narrative in markets. The Fed will have to choose between validating this easing in financial conditions versus unsettling the markets by remaining steadfast.

Highlights

The S&P 500 is up 17% from its mid-June low. The Fed says that they’re going to have to keep raising rates.
The breakeven inflation rate for the next five years has fallen from 3.6% to 2.6%.
Between 2001 and 2019, rents rose 16% while renter incomes rose only 5% (in real terms).

Climate News

U.S. agricultural forecasters expect drought-struck farmers to walk away from more than 40% of the 12.5MM acres they sowed with cotton and harvest the smallest area since Reconstruction. December cotton futures have been rising.

The federal government has declared an unprecedented new stage to the water shortage afflicting the Colorado River, triggering cutbacks that will economically damage the Southwest. The cuts are less than one million acre-feet (although they had earlier warned of 2MM – 4 MM of cuts). An acre foot is enough water for a typical family of four for one year.