Late Summer Early Fall Pullback

Weakness in the labor market and fears of a potential recession in the US have rattled global investors.  But we find it hard to believe that the economy has fallen out of bed after a few weak economic data points.  Yes, it is undeniable that there have been a few reports pointing to economic slowing.  But as we have pointed out before, there is a big difference between slow growth and no growth.  Accommodative monetary policy, starting next month, will either prevent a recession outright or make sure it remains shallow. 

In either case, don’t panic.  Maintain your long-term approach.  Stocks will and have started to rebound from the correction which started in early August.  We won’t go as far as Moody’s Mark Zandi, who said investors should “go read a book” during economic and market turmoil.  But you get the point. 

In addition to analyzing current conditions, we’ve taken the opportunity to reflect on our intermediate term outlook and ask ourselves an important question.  Yes, things looked sloppy over the first part of August, but what will the economy and the markets look like a year from now?  Will we feel better?

The answer is “yes.”

If you’ve been observing the economy and the markets closely this year, you have noticed that disappointing economic data has generally been a positive for stocks.  That’s because any weak data reinforced the case for the Fed to start cutting interest rates.  And as we all know; equities love lower interest rates.  But that all changed a couple of weeks ago.  Now that investors and analysts are no longer laser focused on inflation (due in large part to the good work of the Fed), they are zeroing in on labor markets and, by extension, economic growth. 

We have a while until the next Fed meeting, which is scheduled for September 17-18th.  In the meantime, we will get more Consumer Price Index (CPI) reports, one more Labor Department employment report, and several weekly jobless claims snapshots.  With a mantra of economic data dependency, the Fed won’t be swayed by stock market volatility.  For example, we see it as extremely unlikely that the Fed executes an emergency rate cut.  They also won’t be swayed by politics. 

Will their efforts be too late to prevent a full-blown recession (which could hit stocks hard)?  As we’ve been saying, we see economic growth slowing in the months ahead, but not contracting for two quarters or more.  We’ll keep a close eye on the 3rd Quarter.

We should remember that stock market volatility typically rises in the summer to early fall period.  It should come as no surprise then, especially given the rich prices at which stock were trading, that we started experiencing an early August selloff (markets have since recovered significantly.  With favorable Fed policy on tap soon and solid gains in the books form the first seven months of the year, we recommend patience and resolve.