The biggest risk to markets has always been (in my opinion) that the Fed keeps hiking well past the point they should be cutting. We may now be approaching that fork in the road, which means it’s time to stop worrying about going too fast and start worrying about going too slow.
The market went down on this morning’s better-than-expected jobs report, but I expect we may be about done with the good-is-bad thing.
The good-good news is that inflation is peaking, and the good-bad news is that the economy is slowing. So, the Fed is getting what they want. But that won’t stop them from raising 50 bips at each of the next two meetings. Is that too much of a bad thing?
The biggest risk to markets has always been (in my opinion) that the Fed keeps hiking well past the point they should be cutting. We may now be approaching that fork in the road, which means it’s time to stop worrying about going too fast and start worrying about going too slow.
That makes this a perilous time for markets. So far, all that’s really happened at the index level is multiple contraction. Which is to say, it’s only the P in P/E that’s been falling. Real bear markets are when the E is falling, too.
You may feel like your portfolio has already had its arms and legs chopped off, but if the E starts falling, today’s damage will look like just a flesh wound.
Is that what we’re headed for? Or can we stick a Goldilocks landing? Let’s see if some charts can at least tell us where we are, if not where we’re going.
What bear market?
The S&P 500 is currently 14% off its highs. It feels a lot worse, right? But it could get a lot worse, too. To paraphrase a New Jersey great, if this really is a bear market, we may be only half way there. (And we are definitely living on a prayer.)
Down 14% might not be enough for the Fed.
Which is why the market traded lower on today’s good news of better-than-expected payrolls. But while we’re still adding jobs, we’re adding them at a slower pace. Probably not slow enough for the grinches at the Fed, however.
The grinches are worried that more jobs means we will buy more stuff.
But we’ve slowed our roll there, too — we’re still buying, but we’re also occasionally going outside, too. The Fed would be happy if we did more of the latter.
Our bank balances keep growing:
But not at the same torrid pace as previously. We’re about back to normal.
Money supply is doing the same:
M2 is a little old skool, but so is the Fed, so this may help them sleep at night.
Their own models should do, too:
The Atlanta Fed’s GDPNow model sees the economy growing at a not-too-hot 1.3% in Q2 vs. the consensus of 2.9%.
Note: All of the above metrics — payrolls, final sales, deposits, M2, GDP — remain above zero. We’re still growing, just not as fast. That could make for the Goldilocks scenario that keeps us out of a full-blown bear market. If all these metrics drop below zero, however, we’re in trouble: That’s when the E in P/E starts falling — and then all bets are off.
I maybe could have spared you all those charts and just showed you this one:
Longer term, the stock market (orange) goes as the economy (purple) goes. If all the above charts remain above zero, the purple line should be OK, which means the orange line should be, too. Unlike this morning, good news for people is usually good news for markets.
Let’s hope for more good news. (But not too good.)
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Market strategist and author of this newsletter Byron Gilliam details crypto's outlook as an investable asset class and how private markets are losing their advantage.
