The first half of the year was marred by inflation fears, this past month recession fears have been the headlines, and yet now markets are moving higher. Our discussion of inflation and the role of the Fed has been well documented. Inflation ruled the day over these past six-plus months and the Federal Reserve has been acting swiftly (and playing catch up) to squash it. The CPI numbers that measure inflation are lagging indicators and still show rising inflation, but the forward-looking numbers like commodity prices (especially gas) and business growth (measured by revenue) are coming down significantly. Oil and other commodities peaked in early June, and of these companies – Google, Tesla, Microsoft, Netflix, Amazon, Apple, and Facebook – all are growing at their slowest pace since 2019 or in Netflix and Facebook’s cases, slowest since 2012 and company history, respectively. On top of that, GDP growth has been negative over the past two quarters meeting a classical definition of recession. Note that recessions are also good ways to curb inflation, even though that’s not what anybody wants. So, why are the markets up roughly 15% from their lows? Markets are forward-looking and they are predicting that interest rates have peaked, and growth will continue even if it is slow.
The simple definition of a recession being two consecutive quarters of contraction does not give the full picture. For most people, a recession shows up in their daily lives through job losses, business closings, and bankruptcies. But as we look around, that is not what we see. Job growth remains strong, with millions of excess job openings available, and voluntary quit rates are still at all-time highs. Consumer spending is still growing, and business investment is unchanged from a year ago. And if you look at GDP from a year ago instead of relative to last quarter you also still see growth. Slower growth, but growth, nonetheless. This is what the market is pricing in.
To summarize, massive stimulus during the pandemic along with supply chain disruption from COVID and war caused a huge inflation spike, the markets and the Fed freaked out and made efforts to remove cash from the economy and thus caused economic slowdown/contraction. Now the markets are looking ahead to lower inflation and moderating growth and bidding stock prices higher again. It will be a choppy second half of the year, but history tells us the risk/reward of investing during this part of the economic cycle favors taking the risk.