Recession Fears Roil Markets Amid Inflation: What To Watch This Week

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As interest rates adjust higher and the cost of capital rises, we expect some further widening in spreads. But so far expectations for credit risk and defaults remain subdued, more consistent with a midcycle slowdown rather than the end of the cycle. The yield curve (10-year rates minus two-year rates) has flattened dramatically in recent days as short-term rates spiked to reflect larger anticipated rate hikes from the Fed while longer-term rates rose less – an indication of an outlook for weaker economic growth. As the world economy expands, more foreign stocks join the ranks of market’s biggest winners. Our overweight to value over growth investments has been beneficial, as technology has led to the downside during this market weakness.

Recession Fears Roil Markets Amid Inflation: What To Watch This Week

Angelo graduated magna cum laude with a bachelor’s degree in business administration from Athens University of Economics and Business in Greece and received an MBA with concentrations in finance and investments from Minnesota State University. Within fixed-income portfolios, we favor investment-grade bonds, with a smaller allocation to high-yield bonds. This chart shows that credit spread have recently risen and started to price in a recession ahead. This chart shows the results of the Edward Jones economic DotBig health indicator which remains above recessionary levels. Our cycle model has moved lower recently, and while it’s not consistent with a more assured recession, several of the signals we monitor tell us we’re enduring a late-cycle phase. It’s worth emphasizing that conditions are still similar to 2011 and 2016, which proved to be midcycle slowdowns. And while it is still quite feasible that the economy can avoid an outright recession, the eye of the needle that the Fed is trying to thread has narrowed.

Relative Strength at New High A stock’s Relative Strength line compares its price performance to the S&P 500. This screen unearths top-rated, growth stocks whose RS lines are hitting new highs. It is especially bullish when an RS line hits a new high before the stock scores a new price high. Stock Spotlight Stock Spotlight highlights companies with strong earnings and sales growth along with high Composite Ratings and/or stocks with solid fundamentals that are near new highs and above their 50-day moving averages. This has, to some degree, dashed the prospects of the economy maintaining its momentum long enough for inflation pressures to subside without this more aggressive Fed action. Markets have responded in knee-jerk fashion, dipping to a 2022 low amid rising recession fears.

We suspect some downward revisions to corporate earnings are coming as profit margins are impacted by rising input costs. But earnings growth should remain positive, thanks to reasonably healthy revenue growth, which can provide a pillar of support for a return of optimism as we move through the year. With unemployment being a lagging indicator of the market cycle, we pay close attention to the more timely applications for U.S. state unemployment insurance, or initial jobless claims. Jobless claims tend to lead major inflection points in the unemployment rate by six to nine months and have historically risen by 25% before the economy entered a recession. While claims remain low, they have been on an uptrend since April, rising about 20% from their low. As companies look for ways to defend profitability amid slowing demand and rising costs, we would expect to see some moderation in job growth in the months ahead, with the progression of jobless claims being an important gauge to pay attention to. Consumer confidence has been sapped by inflation worries, with the June reading of the University of Michigan Consumer Sentiment Index coming in at the lowest on record.

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The first-quarter earnings results and forward guidance provided some reassurance that corporate earnings can still grow at a solid pace this year, partly offsetting the headwind of declining valuations. Despite some high-profile earning misses in the tech space, consensus still expects the S&P 500 earnings to grow 10.5% this year and 9.2% in 20231. Stocks that Funds are Buying Look at every super stock and you’ll find big mutual funds buying increasingly large stakes in these top-rated companies.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

  • Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.
  • It is especially bullish when an RS line hits a new high before the stock scores a new price high.
  • This image shows the shifting dynamics in our preferred indicators of economic growth.
  • We recommend maintaining a modest tilt toward value, though opportunities in growth-style investments may begin to emerge as we advance.
  • But we are seeing small signs of freezes and layoffs which could begin to add to consumer caution.

The labor market still looks strong, as job growth has continued at a solid rate through May. Even with more workers rejoining the labor force this year, the job market remains tight, with nearly twice as many openings as unemployed people. And despite investor worries about an imminent recession, the unemployment rate has fallen this year and continues to hover near record lows, at 3.6%. For perspective, the U.S. economy has always fallen into recession whenever the three-month average of the unemployment rate has risen by more than 0.3%. That said, we don’t expect profits to decline from last year, as resilient demand and strong pricing power provide support. But the likely necessary process of revising earnings expectations lower will weigh on sentiment in the quarters ahead.

With the move in the last two weeks bringing 10-year yields above 3.2% (topping 3.4% at one point last week), we think there could be a bit more upside to longer-term rates. However, we maintain our view that the bulk of the move higher is behind us1. CAN SLIM Select A list of market-leading stocks generally showing strong earnings growth, positive institutional sponsorship and industry group relative strength as well as solid sales growth, profit margin and return on equity. The list takes overall market health into consideration and adds stocks in healthy market environments.

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We believe a recession would require a notable uptick in unemployment (historically the unemployment rate rises by 0.5%, on average, ahead of recessions). With twice as many job openings as unemployed people, there is a credible case for unemployment to remain low for an extended period. But we are seeing small signs of freezes and layoffs which could begin to add to consumer caution. With household spending comprising 70% of GDP, consumer GOOGL incomes and attitudes are currently representing opposing forces to consumption habits. Coming into June, we held the view that the year-to-date jump in interest rates was largely pricing in a necessary amount of Fed tightening that would transpire this year. But with headline inflation remaining stickier for longer, the recognition that the Fed will ramp up its rate hikes in coming months produced a sharp reaction in the bond market.

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This screen highlights stocks to watch that are showing increasing fund ownership in recent quarters. The Fed is being forced to further accelerate its rate-hiking campaign in an effort to quell inflation expectations, raising risks of a Fed-induced recession. Headline inflation has remained stubbornly high amid geopolitical shocks to oil and food prices along with lingering supply bottlenecks. State of the Stock Market Webinar What’s going on in the stock market this year? The major indexes sold off last week on recession fears, as energy stocks finally cracked.

Renewed Concerns About Inflation Has The Fed Triggered

Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events. Diversification does not guarantee a profit or protect against loss in declining markets.

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Meanwhile, the market and the Fed, insofar as it impacts inflation expectations, have now become more focused on headline inflation, which remains elevated. Geopolitical factors (war in Ukraine, COVID-19 lockdowns in China) – which were not part of our outlook coming into 2022 – are keeping headline inflation higher for longer. Unfortunately, Fed tightening can do little to drive oil and food supply higher, which is adding to the discomfort around the outlook for consumer spending, as this raises the risk of crowding out discretionary spending. We don’t think the reactions are irrational, but we do think they’re pricing in a degree of pessimism that may be overshooting, creating a more compelling risk-reward outlook in which potential upside is increasingly attractive relative to the near-term challenges.

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