The Signals and the Noise
What happened last week?
- The S&P 500 lost -0.28%
- The Dow Jones was down -0.13%
- The Nasdaq composite rose 0.59%
One can see today’s economy as a glass half full or half empty. Conflicting and confusing data have been reported recently. Could the most reliable signal of a future recession — the inverted yield curve — fail us this time?
Despite the seasonal swings typical for January, there’s plenty of evidence to support our view that the Fed’s sharp turn to monetary tightening that began last year isn’t done working its way through the economy.
3 Things to Know
The glass is half empty and half full
Looking at reams of objective data, one can see today’s economy as a glass half full or half empty. Conflicting and confusing data have been reported recently.
What does this mean for investors?
In short, while we believe investors have experienced the worst of the bear market in 2022, we don’t think it’s “all clear from here.” In recent weeks, strong equities and credit markets have effectively provided easing while the Fed continues to tighten.
The odd aspect of the early-year performance for financial markets is that “lower quality” assets have led the rally. The lowest rated tier of the junk bond market has led high-yield returns. Last year’s laggards — unprofitable companies — have crushed industry leaders year-to-date. Meanwhile, strong economic data suggests the Fed has a longer way to go to fight inflation.
Economic signals are hard to identify
The Fed’s dramatic turn toward monetary restraint began just 11 months ago is still working its way through the economy. And again, in historical context, the recent bullish performance of financial markets after the Fed inverts the US yield curve has precedent.
After a pandemic, a war in Ukraine and divergent policy decisions by the world’s largest economies, it’s understandable that clear economic signals are hard to identify. We are seeing peak seasonal swings in the economy, particularly after a time of great instability and upheaval.
This makes the government’s job of providing consistent and useful readings on the monthly performance of the economy much harder. To be fair, though, this cuts in both directions. Both the strongest and the weakest reports deserve equal scrutiny.
A housing recovery that isn’t
A look at the share prices of homebuilders would make some think the recession has passed and we were passing through the trough of a poor housing market. We have previously highlighted the extreme low marked in prospective US homebuyer traffic near the end of 2022.
In the first two months of 2023, a few more buyers showed interest. A bottoming in the housing industry would seem to suggest that the Fed’s “rate shock and awe” is passing.
Yet, the low real activity levels associated with housing, manufacturing and international trade are all consistent with a far worse labor market than the one featured in government reports for early 2023.