Slow Fashion

We may not know the latest fashion trends, but we do know that “slow fashion” is a movement growing in popularity, and one we think is relevant to financial markets. “Fast fashion” is created without concerns about where the fabric comes from or what types of dyes or chemicals are used in the garment’s creation. “Slow fashion,” by contrast, considers the long-term environmental and human impact of the supply chain and focuses on sustainability and lasting quality.

Since mid-June, risk assets have posted a significant rally as bond yields have come down, corporate earnings have held up, and a slightly slower pace of inflation has led to hopes of a slower pace of rate hikes from the Federal Reserve. These trends have rightfully supported the recent U.S. equity market rally. That said, just like with the concept of “slow fashion,” investors may wish to take a longer-term view and consider the whole of the product (or in this case the economic) cycle. After all, we are trying to decipher what is going to happen in the future, not what happened today or even yesterday. That leaves us with big questions.

First, we are still a long way from the finish line if the Fed remains intent on getting inflation (as measured by the PCE deflator, which stands at 6.8%) back down to its 2.0% inflation target. We were encouraged by the July consumer price index (CPI), which showed headline inflation falling from 9.1% to 8.5%, but gasoline prices were the primary reason for the drop in headline inflation. Easing the pain at the pump is clearly a good thing, but when energy prices are excluded, CPI inflation has been steady at 6.6% for four consecutive months now (see figure 1). That reflects offsetting trends below the headline with used car prices and airfares coming down while shelter and food prices are still on the rise. We suspect that July’s one-month decline is not sufficient for the Fed to declare victory. Most likely they will want to see a broader and more sustained decline in both goods and services prices.

This line chart shows the year-on-year percent change of the U.S. Consumer Price Index from January 2019 to July 2022.

Importantly, the net percentage of small businesses reporting that they intend to raise prices has come down steadily – falling from 52% in March 2022 to 37% in July 2022, but the percentage is still higher than during any other time pre-COVID (see figure 2).

This line chart shows the Net Percentage of Small Business Planning to Raise Average Selling Prices from 1987 to 2017.

Second, while the blowout July jobs report, likely confirms that the U.S. economy is not in a recession, it doesn’t mean we can completely rule one out down the road. Importantly, leading economic indicators will likely weaken further as the Fed continues to tighten monetary policy (see figure 3).

A lot will depend on how sticky inflation proves to be and the Fed’s response to that data. A 50 basis-point rate hike at the September meeting seems more likely than a 75 basis-point rate hike following the better-than-expected July CPI print, but the July employment report might give policymakers the confidence to tighten even further given the labor market’s continued strength. The inherent risk is that coincident employment data tell investors little about the future with recessions almost always starting when the unemployment rate is low (see figure 4). The Fed still appears to be on the move and the bulk of the impact of monetary policy tightening is yet to be felt. So, in our view, investors may wish to remain cautious and focused on both quality stocks and quality fixed income (particularly stocks with stable dividend growth).

This line chart shows the U.S. Leading Economic Indicator Index vs. year-over-year percent of Real Gross Domestic Product from 1986 to 2021.

This line chart shows the U.S. Unemployment Rate in percent vs. Periods of U.S. Recession from 1948 to 2020.

While the Nasdaq has officially entered a bull market having rallied 22% off of its lows, between the end of 1999 and the end of 2002, the Nasdaq experienced at least four separate 20% intra-year rallies (a couple of them were 40% rallies) before finally bottoming in October 2002. We don’t think this period is likely to mirror the Tech Bubble – technology companies are much more profitable and mature now than they were then – but it underscores the point that bear market rallies are not unheard of and do not always imply that market volatility is a thing of the past (see figure 5).

This line chart shows the NASDAQ Composite Index Between 1998 and 2004.

What Should U.S. Investors Watch in the Week Ahead?

Investors will get fresh reads on the housing sector with home builder confidence and housing starts set to be released. Industrial production and retail sales for the month of July will also be reported. The retail sales report will provide a timely update on the U.S. consumer. The Federal Reserve will also publish its July 27 Federal Open Market Committee (FOMC) meeting minutes.

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Index	Weekly Chgchange in percent	YTDyear to date change in percent	12 Months12 month change in percent	Div. Yield division yield in percent
Dow Jones	2.9%	-7.1%	-4.9%	2.0%
S&P 500	3.3%	-10.2%	-4.1%	1.5%
NASDAQ	3.1%	-16.6%	-11.9%	0.8%
Instrument	Weekly Chgchange	YTDyear to date	12 Months12 month change	Level
10-Year Treasury Yield (%)	0.4 bps	132.1 bps	147 bps	2.83%
Gold ($/Oz.)	1.5%	-1.5%	2.8%	$1,802.4
Oil ($/bbl)	3.5%	19.6%	33.3%	$92.09

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This table shows returns for various USA equity markets and select assets, in weekly, year-to-date and 12 month changes.

Index	Weekly Chg change in percent	YTD year to date in percent	12 Months12 month change in percent	Div. Yield division yield in percent
Global	2.8%	-12.9%	-10.5%	2.1%
Europe	1.9%	-17.7%	-17.9%	3.4%
Japan	2.6%	-15.3%	-16.5%	2.4%
Emerging Markets	1.6%	-15.7%	-18.9%	3.2%

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This table shows the US Stock Market Returns and Select Assets and International Stock Market Returns.

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Date	Time	Event	Period	Consensus	Prior
8/15	8:30	Empire Manufacturing	AugAugust	5.0	11.1
8/15	10:00	NAHBnational association of home builders Housing Market Index	AugAugust	54.0	55.0
8/16	8:30	Building Permits	JulJuly	1640k thousand	1685k thousand
8/16	8:30	Housing Starts	JulJuly	1529k thousand	1559k thousand
8/16	9:15	Industrial Production MoMMonth over Month	JulJuly	0.3%	-0.2%
8/17	8:30	Retail Sales Advance MoMMonth over Month	JulJuly	0.1%	1.0%
8/17	8:30	Retail Sales Ex Auto and Gas	JulJuly	0.4%	0.7%
8/17	14:00	FOMC federal open market committee Meeting Minutes	7/27/2022	-- empty	-- empty
8/18	8:30	Philadelphia Fed Business Outlook	AugAugust	-5.0	-12.3
8/18	10:00	Existing Home Sales	JulJuly	4.88m million	5.12m million
8/18	10:00	Leading Index	JulJuly	-0.5%	-0.8%

This table lists a number of key economic events, analysis reports and forecasts from influential institutions.

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