By Just when everyone thought it was safe to relax, sharks have resurfaced in both the box office and the tranquil beaches of Cape Cod. However, it’s not just the threat of these toothy predators that has people on edge. All three major indexes are currently in the red for August, and there are troubling signs that the economy may be heading towards a recession that many refuse to believe will happen.
This unexpected twist in the economic narrative has left strategists scratching their heads. Just last month, they were confidently raising their S&P 500 targets and dismissing recession forecasts. Slowing inflation and resilient economic data seemed to indicate that the Federal Reserve had successfully navigated its way through increasing interest rates without causing a crash landing.
Yet, as we know, the market is a fickle beast. It climbs high on walls of worry and comes crashing down when optimism runs rampant. Unfortunately, it seems like we may be experiencing the latter now. Ed Yardeni, President of Yardeni Research, remarks, “When the most anticipated recession of all times is no longer anticipated, and the consensus is now aligned with us in the no-recession camp, our contrarian instincts are on high alert.”
Yardeni’s concerns stem from the disappointing July jobs report which fell short of economists’ expectations. While employment reached a new record high, the month-over-month increase was a mere 0.1%. Even more worrisome is Yardeni’s observation that the three components of the Index of Coincident Economic Indicators, which closely track the trajectory of U.S. gross domestic product, are also showing signs of weakness.
He highlights that real personal income, once adjusted for inflation, may have actually declined last month. Although income experienced a slight increase, the average workweek saw a small decline. This suggests that workers may have received less pay in July due to the impact of higher prices.
Furthermore, Yardeni points out that real business sales slipped in July. The lackluster performance of the retail sector, which represents a significant portion of manufacturing and distributor sales, may be to blame. Additionally, both manufacturing employment and industrial production remained stagnant on a month-over-month and year-over-year basis, hinting at a slowdown in this key sector.
These concerns follow The Conference Board’s announcement in late July that its Leading Economic Index had declined for the 15th consecutive month in June. According to the organization, this points to further deceleration in the business cycle and they are predicting a recession as early as 2024.
The current state of affairs is indeed unsettling. The return of sharks is nothing compared to the turbulent waters of our economy. With the consensus fervently believing there won’t be a recession, perhaps it’s time to heed the warning signals that only contrarians like Yardeni can truly appreciate.
Uncertainty Looms Over the Market
Industry experts are expressing their apprehension as the market experiences a rally in 2023. Yardeni, an esteemed analyst, shares his unease, highlighting that the market is already factoring in the best possible scenario for this year. He believes that it would require something significant to drive stock prices higher at this point. Sevens Reports’ founder, Tom Essay, echoes this sentiment.
UBS, a prominent financial institution, has also weighed in, cautioning that the market’s lack of activity could persist throughout the month. They anticipate that a notable shift in market sentiment will likely occur only after the release of August data and the September Federal Open Market Committee meeting.
Even Fundstrat’s bullish Tom Lee acknowledges the lackluster performance of the stock market in August. This could make it challenging for stocks to overcome their recent stagnation. Additionally, historical data does not provide much optimism for short-term investors, as the dreaded “September Effect” has historically resulted in the market’s worst monthly returns.
However, amidst the uncertainty, there are some positive aspects to consider. The latest employment figures indicate that the job market is thriving and remains near a 54-year low. These numbers should ease concerns about an interest rate hike by the Federal Reserve in September. Furthermore, slowing wage growth may contribute to curbing inflation.
While Yardeni maintains a relatively positive outlook, assigning an 85% probability to avoiding a recession in the U.S., he doesn’t anticipate significant gains in the market following its recent surge. He sets his year-end target for the S&P 500 at 4,600. However, he anticipates a more substantial bull market resurgence in 2024, with a projected index level of 5,400.
Nonetheless, it’s important to acknowledge that 2023 has defied skeptics in the past. The existence of choppy waters does not necessarily guarantee a sea of troubles, and investors may need to navigate through uncertainty for some time.
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