Just when you thought the waters were safe: Sharks are back at the box office and Cape Cod beaches, all three indexes are in the red for August, and the economic data may be pointing to a recession no one believes will happen.
It wasn’t supposed to be like that. Only last month, strategists were raising their S&P 500 targets and pulling their recession forecasts as a combination of slowing inflation and resilient economic data suggested that the Federal Reserve had managed to avoid a hard landing even as it raised interest rates to levels seen earlier this millennium.
But the market has a strange way of working. It climbs walls of worry and sells off when people get too optimistic. The latter might be the case now. “When the most widely anticipated recession of all times is no longer widely anticipated…[and] with the consensus now elbow-to-elbow with us in the no-recession camp, our contrarian instincts are on full alert,” writes Yardeni Research President Ed Yardeni.
Yardeni’s concerns begin with the July jobs report, which missed economists’ expectations. Though Employment still ticked up to a new record high, it rose just 0.1% month over month. More worryingly, Yardeni argues that the July report indicates that the three components of the Index of Coincident Economic Indicators—known to closely track the trajectory of U.S. gross domestic product—are also weakening.
To wit, he notes that real personal income, i.e. income adjusted for inflation, may have fallen last month. While income edged up again, the average workweek also declined slightly, which means workers may have seen a small reduction in pay in July, given the impact of higher prices.
In addition, he notes that real business sales also slipped last month, given that employment in retail—a third of manufacturing and distributor sales—was basically flat for July. Likewise, employment was also flat both month-over-month and year-over-year in manufacturing, which could point to a slowdown in industrial production.
This comes after The Conference Board announced in late July that its Leading Economic Index fell for the 15th straight month in June; the organization argues that points to further deceleration in the business cycle and it’s predicting a recession in early 2024.
Yardeni isn’t the only one feeling a sense of unease. Sevens Reports’ founder Tom Essay notes that with 2023’s rally the market is already pricing in “the best outcome anyone could have hoped for at the start of the year…and it will take something else to push stocks materially higher from here.” UBS, meanwhile, warned last week that the market’s listlessness could last all month, and predicted it would “take the release of August data and the September Federal Open Market Committee meeting for the market narrative to shift notably, in one direction or another.”
Even Fundstrat’s Tom Lee, a notable bull, points to August’s lackluster record in terms of stock market returns, which may make it more difficult for stocks to shake off their recent malaise. Nor does history doesn’t offer much near-term hope to patient investors, given that September Effect has reigned over the market’s worst monthly returns for nearly a century.
Still, it’s worth noting that there was good news in the latest data. Not only is employment hovering near a 54-year low, but the numbers were middle-of-the-road enough that they’re unlikely to spark another interest interest-rate hike from the Federal Reserve in September; slowing wage growth also comes with the benefit of potentially further cooling inflation.
Yardeni is quick to note he isn’t too bearish, putting the odds that the U.S. will indeed avoid a recession at 85%. Nonetheless, he also doesn’t think that the market will be able to rally much more after recent dizzying gains, pinning his year-end
S&P 500
target at 4,600, before the bull market resumes more earnestly at some point in 2024, when he thinks the index can reach 5,400.
Still, 2023 has defied naysayers before. Choppy waters may not necessarily lead to a sea of troubles, even if investors do have to spend some time adrift.
Write to Teresa Rivas at [email protected]
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