Signs of the Times: What Are Key Indicators Signaling?

DEWITT, Mich. - July 25, 2023 - PRLog -- Key Takeaways:

• Stocks have rallied sharply off of the October bear-market low, recouping the majority of the 26% decline between January and October of last year.
• Trends in jobless claims, labor turnover and hourly earnings are, in our estimation, signaling some emerging fatigue that will transpire in the second half of the year. Although a deceleration in personal consumption will weigh on the overall economy, we think there are green shoots emerging that will support a more benign slowdown.
• Despite mixed signals around the near-term path for the economy, there are reasons for investors to be optimistic about the markets, even as growth is slowing.

Stocks continued their march higher last week, adding to 2023's impressive gain that now has the S&P 500 within 6% of the all-time high.* The latest batch of corporate earnings announcements offered an additional boost, as quarterly results have, so far, indicated that companies are adequately navigating the terrain of high but falling inflation (labor and input costs) and strong but moderating demand (sales). The run in the markets since May has largely been powered by rising optimism around the potential for a goldilocks scenario, in which economic conditions are neither too hot to prevent inflation from falling further, nor too cold to descend into recession.

Equity Markets

• Stocks have rallied sharply off of the October bear-market low, recouping the majority of the 26% decline between January and October of last year.* This rally has gained steam of late, supported by incoming data indicating the economy is holding up despite the Fed applying the brakes for the last year and a half.
• If a recession were to be avoided, this would join the bear markets of 1987 and the mid-1960s as the 20%-plus stock-market declines that were not accompanied by recession.

Interest rates

• The Fed has been firmly behind the wheel of the financial markets, as it has embarked on its most aggressive tightening cycle in four decades. Restrictive monetary policy is a reliable catalyst for recessions, and we're mindful not to dismiss the lagged impacts recent rate hikes could have on the economy.

Watching the Signs

• Despite mixed signals around the near-term path for the economy, there are reasons for investors to be optimistic about the markets, even as growth is slowing. Markets are forward looking, just as investors should be when it comes to keeping portfolios in alignment with financial goals. Looking back at bear markets since 1948, each started before a recession occurred, and stocks began their recovery before the economy rebounded.**

Source: *Bloomberg, S&P 500 Index performance.  **FactSet.