The global equity market staged a mild comeback last week with the MSCI World Index jumping 3.2%. In the United States, the tech-heavy NASDAQ surged 3.3% while the S&P 500 gained 2.6%. Technology stocks added to recent gains as the U.S. 10-year U.S. Treasury yield continued to fall – finishing the week down 16 basis points at 2.75%. Non-U.S. markets posted positive returns as well with Japanese stocks rising 5.3% while European stocks posted a 4.3% gain as investors welcomed the reopening of the Nord Stream II pipeline. Emerging market stocks rose 3.0%.
The U.S. economy may log its second consecutive quarter of economic contraction when real gross domestic product (GDP) is reported later this week. While some investors have argued that this fits the technical definition of a recession, the National Bureau of Economic Research (the arbiter of U.S. recessions) states on its website that, “in recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.”1 In fact, the webpage mentions GDP just once while it mentions employment five times. It seems the Fed agrees with this assessment as it is widely expected to raise interest rates by an additional 75 basis-points on July 27.
Aesop’s fable of “The Tortoise and the Hare” tells the story of a rabbit who loses a race against a turtle because it took a nap midway through. Eventually, we suspect that the Fed will need to become less like the overly confident rabbit and more like the slower, but steady turtle in order to avoid a policy overshoot. That could happen relatively soon as investors now expect the Fed to downshift from 75 basis-point rate hikes to a 50 basis-point rate hike at its September meeting. Combined with falling gasoline prices, these hopes seem to be spurring a bit of a welcomed rally in risk assets of late.
The Fed’s policy stance heading into 2023 will likely determine whether this recent rally holds or proves premature. We do think it’s worth pointing out that the S&P 500 tends to bottom about halfway through a recession, but not before one. Since 1929, the S&P 500 has troughed somewhere between four to six months prior to the end of a recession.