The Markets - April 10, 2023
Some illustrations are optical illusions. When two people view the picture, they may see completely different images. A good example is Rubin’s Vase. One viewer may see a vase, while another sees two faces.¹
Current economic conditions can be interpreted in different ways, too. Recent economic data and a possible credit crunch, resulting from upheaval in the banking sector, suggest growth is slowing. After viewing the data, some say we’re heading for a soft landing, and others say a recession is coming.
Here is the recent data:
• Consumer spending. This is the main driver of economic growth in the United States. While Americans are still buying, the pace of spending slowed in February, according to a late-March report from the Bureau of Economic Analysis.² Less spending means lower demand for goods and services – and that effects production.
• Production of goods and services. Last week, the Institute for Supply Management reported that activity in the manufacturing sector – automakers, food producers, pharmaceutical companies and other companies that make products – shrank for the fifth consecutive month.³ Activity in the services sector – airlines, banks, building maintenance and other companies that provide services – continued to expand but at a slower pace.⁴
• Employment. The employment report indicated the labor market in the U.S. remained resilient and jobs growth was solid in March. It’s notable that there were fewer job openings and more Americans returned to the workforce. The unemployment rate remained steady at 3.5 percent. In addition, average hourly earnings edged higher, according to the U.S. Bureau of Labor Statistics.⁵
Randall Forsyth of Barron’s reported, “The solid employment report for March further raises the odds that the U.S. economy is headed for a proverbial soft landing.”⁶ Not everyone agrees.
Economist and former Treasury Secretary Lawrence Summers gives more weight to manufacturing and services data than employment data.⁷ He also pointed to the Dallas Federal Reserve’s Banking Conditions Survey, which showed lending volumes declined sharply in March.⁸ Summers told Bloomberg’s Wall Street Week with David Westin:
“Employment and unemployment are lagging indicators of what’s happening in the real economy…There is some substantial amount of constriction in credit. If you looked at the forward- looking numbers this week from the PMI surveys, those numbers were quite weak…Recession probabilities are going up at this point. The Fed has a very, very difficult decision ahead of it.”⁷
Major U.S. stock indices finished the week with mixed results, reported Carleton English of Barron’s.⁹ In the Treasury market, yields on many shorter-maturity increased, while yields on longer-maturities fell.¹⁰
INVESTORS VS. THE FEDERAL RESERVE. In the 1970s, Martin Zweig cautioned investors: Don’t fight the Fed. He believed there was a correlation between Federal Reserve monetary policy and the direction of stock markets, reported Steve Sosnick of Barron’s.¹¹ Here’s generally how it worked:
• The Fed makes more money available – pursuing loose or expansionary monetary policy – during economic downturns or recessions. It adjusts the money supply by moving the federal funds rate lower so companies can borrow inexpensively and hire workers. In turn, workers spend more, and the economy grows. Stock markets tend to rise when the Fed is pursuing loose monetary policy.¹²
• The Fed makes less money available – pursuing tight or restrictive monetary policy – during periods when the economy is overheating, and inflation swings higher. It adjusts the money supply by moving the federal funds rate higher, making borrowing more expensive for companies, which can lead to layoffs. Workers have less to spend, and the economy slows or enters a recession. Stock markets tend to fall when the Fed is pursuing tight monetary policy.¹²
Ultimately, Zweig’s advice meant that investors should be more aggressive when the Fed was pursuing loose monetary policy, and more conservative when it was pursuing tight monetary policy. Will Daniel of Fortune reported: “Investors understood this dynamic during the recovery from the bursting of the U.S. housing bubble, buying stocks in droves while the Fed held interest rates near zero…The central bank’s loose policies helped bring about the second longest bull market in the S&P 500’s history, between Mar. 9, 2009, and the COVID-19–induced bear market of 2020…”¹³
Today, the Federal Reserve is pursuing tight monetary policy, and has indicated that lower rates are not on the table for 2023.¹⁴ Investors seem to think otherwise, though. The Fed raised the federal funds rate in March, but not all Treasury yields followed suit. Yields on longer-dated Treasuries moved lower, suggesting investors think rate cuts are ahead.⁸
Stay tuned. (And remember that many factors influence financial market performance. Fedpolicy is just one of them.)
Weekly Focus - Think About It
“One of my fondest sayings is fail, fast, forward. Recognize you’ve failed, try to do it fast, learn from it, build on it, and move forward. Embrace failure, have it be part of your persona."15
—Carol Bartz, former CEO and president