Summary
- A major contributing factor to the rise in inflation was the spike in consumer spending.
- Healthy GDP growth, low generational unemployment, and relatively stable earnings point to a stable economy.
- While the future remains uncertain at all times, no one knows for sure whether a recession will occur this year or whether the 2022 bear market will last until 2023.
CreativaImages/iStock via Getty Images
Commentators continue to scream doom and gloom about a hard-landing recession, but after an economic hurricane in 2022, there are some signs that the financial clouds have begun to lift this year. The stock market reflected this positive fundamental shift in January, with the S&P 500 soaring +6.2%, the NASDAQ +10.8%, and the Dow Jones Industrial Average +2.8%.
Last year, one of the main drivers of the S&P 500's -19% decline was the highest inflation readings in four decades, exacerbated by a Federal Reserve determined to rein in interest rates. A major contributing factor to the rise in inflation was increased consumer spending fueled by trillions in government stimulus, coupled with widespread commodity shortages triggered by supply chain disruptions.
Fortunately, inflation headwinds now appear to be easing. Recently released inflation data showed that core inflation fell from a peak of 9.1% last year to 3.5% in the fourth quarter (see table below). While the Fed will likely raise its target interest rate from 0.25% to 4.75% this week, the downward reversal in inflation has increased the chances that the Federal Reserve will “pause” or “pivot” in the direction of previous hikes. The chances of a crash or rate cut will likely only increase if inflation’s downward trajectory persists and other future economic data weakens further.
Calafia Beach Specialist
No sign of recession… yet. Investors waiting for another flood
While calls for an economic hard landing remain, healthy GDP growth (+2.91TP3Q in Q4), low generational unemployment (3.51TP3Q), and relatively stable earnings (see chart below) point to a stable economy with the ability to weather a soft landing. The renewed reopening of China's economy and Europe's apparent ability to avoid a recession provide further evidence for a soft landing scenario.
Yardeni
While the tech bubble burst in 2000 had a huge impact on the technology sector, the effect on the economy as a whole was more limited, as evidenced by the slight decline in earnings. As earnings evidence shows, during the financial crisis (2008) and COVID-19 (2020), the collapse in earnings was much more severe. So far in 2023, there has not been a single decline in earnings or sign of a recession, and if financial conditions continue to worsen, there is no reason we won't suffer a more banal recession, as happened in 1990 and 2000.
Stairs and elevators
While the future remains uncertain, no one knows for sure whether there will be a recession this year or whether the 2022 bear market will last until 2023. However, as you can see below, the history of the last 70 years shows that bull markets (averaging about 6 years) are much longer than bear markets (about 1 year). I like to compare bull markets to climbing stairs in a tall building and bear markets to descending an elevator. The main difference is that the stock market elevator usually never reaches the bottom floor, and the stairs continue to climb to record heights over the long term. Since World War II, Americans have experienced 13 economic recessions (see also Recession or mental depression?). Investors are not only betting 1.000% that they will survive these recessions successfully, they have actually prospered. Since 1956, the S&P 500 has risen about 80-fold.
Clearnomics, S&P 500
Right now, the economic skies may not be entirely clear, blue, and sunny, but the fact that inflation is falling, our economy continues to grow, labor markets remain healthy, China is reopening for business, and Europe hasn't collapsed leaves room for optimism. It may not be time to put away the sunscreen just yet, but the dark economic clouds of 2022 appear to be slowly dissipating.
This article is an excerpt from a previously published (February 1, 2023) free newsletter from Sidoxia Capital Management.
Disclosure: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange-traded funds (ETFs), but at the time of publication, did not have direct positions in any of the other stocks mentioned in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax, or other advice, nor should it be used as the basis for making any investment or other decision. Please read the language of the information on the IC contact page.
Editor's note: The summary points in this article were chosen by Seeking Alpha editors.
This article was written by
Wade W. Slome, CFA, CFP® is the president and founder of Sidoxia Capital Management, LLC and the published author of "How I Managed $ $20,000,000,000.00 at Age 32." He has also been featured on ABC News. He has also been quoted in the Wall Street Journal, USA Today, New York Times, Dow Jones, Investor's Business Daily, Bloomberg, Smart Money, and other media publications. Online, he is the editor-in-chief of the investment blog InvestingCaffeine.com and a contributor to Morningstar and the Wall St. Cheat Sheet. Bloomberg identified him as the second-youngest manager among the 25 largest actively managed U.S. mutual funds in 2005. In addition to his work at Sidoxia, Mr. Slome has also worked with investors in the investment industry. Wade Slome holds an MBA from Cornell University with a concentration in Finance. He holds a bachelor's degree in economics from UCLA. He also holds the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner) credentials. Mr. Slome managed one of the ten largest growth funds in the country (US$20 billion in assets under management) at American Century Investments and currently manages a hedge fund as well as separate custom accounts for a selective client base at his firm (Sidoxia Capital Management, LLC) in Newport Beach, California.
Recommended for you
