By Tim Courtney, Chief Investment Officer
Despite recession fears and inflation at its highest level in four decades, unemployment remains low and consumer spending has not faltered much.1 We are in a period of contradictory data, and good news (strong jobs report) is seen as bad news (impending rate hikes) and bad news (inflation fell, but is still above 8%) is seen as good news (rates won’t be hiked so high).2 In this commentary, we look at some of these variables and how they are being priced into the market.
Inflation: Consumer Price Index (CPI) data shows inflation has come down slightly to 8.5% in July. One source of relief comes from falling commodity prices.2 In June, commodity prices peaked and have since decreased around 10-15%.3 Another source of help is the strong dollar. As discussed in last week’s commentary, the dollar is up 11% year-to-date.4 Home prices may also finally be moderating as a result of interest rate hikes, following the 20.6% surge in March.5
While some investors see this as a turning point for inflation, it likely will not solve the whole problem. Labor and housing costs remain high, and much of these costs haven’t yet been fully worked into CPI. As such, we believe inflation will remain elevated well above the target inflation rate (2%) for some time.
Gross domestic product (GDP): Data from the Bureau of Economic Analysis revealed real GDP decreased for a second consecutive quarter.6 While some investors consider this to be a telltale sign of a recession, others are hesitant to make the call given the other strong numbers.
As recession talks grew, interest rates started to decline in June through July. The market celebrated this as lower rates mean higher valuations, and July turned out to be the best month for stocks since November 2020.7 However, there are multiple challenges to growth, and markets are well aware of potential contractions and lower earnings. We believe markets will remain volatile for the rest of the year, but that much of the weakness has already been incorporated into prices.
Consumer confidence: During the pandemic, many consumers purchased goods to enjoy at home. Now, spending on services is likely to increase due to pent-up demand. Airlines, restaurants, and hotels are all packed this summer — something you might not expect to see with consumer sentiment at an all-time low in June.8 However, in some cases, consumers are burning through savings to maintain their standard of living.9 Banks are beginning to set aside greater amounts of capital to provide for loan losses, but so far, there has not been a huge increase in defaulted loans.10 While inflation is currently consumers’ number one concern, it appears they have enough income and savings to weather the storm, for now.
There is not a clear consensus or data pattern indicating how markets should behave in the coming months. Recent news has often set the market off on the opposite path of what many would have expected. This makes us reiterate our stance that diversification within portfolios and sectors remains the most prudent course of action. If you have any questions, please contact your Exencial advisor.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971