Macro Outlook for the Markets: Hot or Not?
Macro Updates
On July 27th, the monthly FOMC meeting occurred. Wall Street analysts had forecasted a 75bps interest rate hike and were proved right by the federal reserve. During the meeting, they touched upon the future of the economy, and the steps that would be taken in the next 12 months during these hazy conditions. The market has seen a different type of inflation through 2022, and economic activity has lowered since then.
The strong labor market which has grown in the past few months has been a number one priority for the Federal Reserve. As Jerome Powell said, “We’ve seen the very beginnings of a slight lessening of the tight labor market” and could bring to the idea that data on the job market might start taking a downturn over the next few months. A squeeze in the job market data may signal that the time of a recession is occurring, but the GDP data reporting on July 28th would make all the difference in the equity markets.
Over the past few months, a common pattern has emerged through these FOMC meetings. Price action has tended to spike before the meeting, and normally closes with an upwards movement as the markets close in New York.
These stagnant numbers from the FOMC meeting lead to a choppy start in the markets, unsure of how the data given to the public would make investors place their bets. As Thursday morning led to higher prices, it created a value opportunity for investors.
GDP Shrinks for Second Quarter in a Row
The day after the Federal Reserve moved to hike interest rates once again in hopes of a “soft landing,” the markets received another piece of data. GDP in the United States retreated by 0.9% through the past quarter. By the agreed technical definition, this defines an economy in technical recession. Two quarters of negative GDP data has always been the benchmark for a declaration of recession by economists and the media.
While the GDP retreated and news outlets have been calling that a recession is occurring, the agency which gives the official ruling has not made a declaration of recession as yet. The markets have responded in a hopeful way, with the S&P 500 moving upwards. A 0.66% gain through mid-day has added some hope in the future of the U.S. economy with some people valuing the price of the S&P 500 right now as a great buy.
During the pandemic, GDP shrank by much larger points than our current situation, so investors have been quick to dump money into the markets during these times in hopes of cashing in strong profits near the end of the year. Forecasts for GDP are still over 1.1% growth for the next few quarters, as per many investment banks.
Future growth data will be important, with another month of negative GDP data likely to make it difficult to deny that the economy is in a recession. Companies are beginning to prepare for the worst case scenario, as companies like Coinbase, Blockchain.com and many others have begun to lay off employees to save their companies. These are early actions in the crypto markets that are in place to protect the companies from what’s to come. These implementations might soon begin to be shown by larger firms across the United States.
Future Expectations for Equities
As the conditions in the market have changed from Q1 of 2022, expectations have changed drastically across the board. GDP growth forecast has been downgraded as the Conference Board Economic Forecast for the US Economy says, “we are downgrading our growth expectations for Q2 2022 from 1.9 percent (QoQ, SAAR) to 0.8 percent.” These expectations are definitive of a slow market, and can showcase what analysts are expecting around the street. Slow growth has occurred before, and will not be the first rodeo for these major investment banks.
Equities will follow a path with the rest of the economy depending on the data, but a slow recession with little to no growth may impact companies hugely. Lay offs and limited R&D are some of the main effects that the recession will have on these companies. At the same time, many institutions that handle mergers and acquisitions will see a slow down from the post pandemic highs, creating a tougher job market as the demand for bankers will slow down.
Not only in the financial institutions group will this be seen, but across all major companies. The different aspects of a recession make it tough waters to tread, but investors can take the time to seize these opportunities that pop up. Tech giants and retail businesses will see a slowdown in sales and usage, as people will be cautiously spending. Historically, consumer spending has gone down by a significant amount during a recession. Food spending goes up during a time of recession, but spending on restaurants, vacations, and services typically is reduced.
Reduced spending, high interest rates, and geo-political tensions have brought the markets to their current standing point. The future looks tough, and analysts are split on whether this recession is truly coming or not. Ranging from 15% to 50% chance, the probability is uncertain of whether complete recession is coming, but the best steps are to move into assets that have a strong history of withstanding a recession, and keeping an eye out for opportunities.
The Bottom Line
More critical data points will continue to roll out through the course of August, and will solidate any forecasts that investors and analysts may have. The current market conditions have been tough, but on Friday the 29th, the market has kept on with the trend in hopes of closing the week out strong. Price action has favored the news lately, and responded well which can be seen as a sign for many investors that people are hoping the worst is done in terms of data.
Markets have seen a recovery in consumer sentiment, driving prices up since the first clear signs of a recession were shown. Investors will seemingly continue betting on these equities and cryptocurrencies in hope that they can buy at significantly lower prices, but the economic forecast and current state says otherwise.
With rising inflation, a shrinking GDP, and a slowed down job market, the future of the U.S. economy may be grim. Research firms provide exceptional analysis that if we are to face a tough recession, the remainder of 2022 and early 2023 will show that in the data.
