How to position your portfolio when the Fed, stock-market investors differ on bearish calls

Federal Reserve Chairman Jerome Powell’s optimistic comments about the US economy on Wednesday added to a debate among investors whether the stock has hit a bear-market low.

On the one hand, Thursday’s report on the health of the US economy prompted even more confusing discourse about where things really stand when it comes to a recession.

Second-quarter GDP data showed the US economy shrank by 0.9% on an annualized basis in the three-month period from April to June, sharpening fears that the economy has already slipped into recession.

See: Is America in recession now? Not Now – And Here’s Why

The S&P 500 SPX, on the other hand, officially entered bear-market territory in mid-June, and cemented its worst performance since the 1970s, indicating that many investors would value in an economic downturn. are determining.

Adding to the malaise was the June consumer-price index, which notably came in at a 41-year high of 9.1%. That was followed on Friday by the release of the Fed’s preferred monthly inflation gauge, the personal-consumption price index, which offers no respite from price pressures at a four-decade high.

But an idea that the Fed may need to “pivot” and move away from its full slate of rate hikes planned in 2023, if the economic picture worsens, is gaining steam on Wall Street, in July. The leading stock is helping the benchmark book its best. months in about two years.

The strong performance of stocks and other parts of the credit markets in July prompted a torrent of outlooks going into August, telling investors why the strategy looked flawed, or not.

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“When looking at the moving averages at stock levels in the S&P 500, it would suggest that we are not out of the woods,” Megan Hornman, chief investment officer at Verdance Capital Advisors, said in a client note this week. “The S&P 500 last week moved above its 50-day moving average for the first time since April. However, only 55% of the stocks in the index are above that average.

“When you want to indicate ‘all clear,’ that number has to be higher – 80 or 90%. When we have reached the bottom, we are all clear,” Horneman said in a follow-up call on Friday. I told Marketwatch. “So I can’t believe the bottom is completely made up. I think there is potential for a lot of volatility. ,

Read: Everything you’re feeling now about stocks is normal bear-market misery — and the worst is yet to come

Are we in recession?

The central bank has taken pains to remind people that just two quarters of negative growth does not necessarily mean the economy is in recession, but that one could still be “almost a slam dunk in the next 12 months”, Jim Reid said. wrote, A Deutsche Bank strategist, in Thursday’s note.

Historical data shows that since 1947 (see chart below), there have never been two consecutive negative quarterly GDP results without a period defined as a recession by the National Bureau of Economic Research (NBER), the official documentary of US economic cycles. are. According to Reid, “it is rare to have negative GDP quarters outside of a recession.”

Sources: BEA, Naber, Havar Analytics, Deutsche Bank

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From Hornman’s perspective, the US has technically already entered a recession after two quarters of declines.

Either way, there have been some bright spots for households as inflation cuts into paychecks. According to data from the US Bureau of Labor Statistics on Friday, wages and salaries for civilian workers increased by 1.4% and 5.3% in the second quarter compared to the year ending in June. A closely watched economic data point next week will be Friday’s jobs report for July. A strong June report fueled optimism that the recession may still be averted.

US Treasury Secretary Janet Yellen said on Thursday that the economy has weakened, but is still healthy by many measures compared to the previous recession. He said some slowdown in the economy is necessary to help tackle inflation.

What does income represent: consumer spending

Consumer spending has long been a major driver of the US economy, according to Apple Inc. Investors cheered this week, with corporate earnings from the likes of AAPL, +3.28% and Amazon AMZN, +10.36%, even as inflation ripples through the economy.

“One theme appears to be from the major companies that have reported their numbers — the demand for their goods and services is healthy,” said Brian Perry, senior director at Navelier & Associates, in a Friday note, adding that top trucking, railroad, Airline linking and lodging companies are reporting solid demand.

As of Friday morning, nearly half of the S&P 500 companies had reported compound profit growth of 76%, according to I/B/E/S data provided by Refinitiv, beating Wall Street’s forecast of 76%. Had been.

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Perry also noted that “the prospect of a downturn appears slim, at least of any significance that would prevent the stock market from breaching its long-term uptrend line.”

Hornman is asking investors to look at the sectors that are most at downside risk to start putting their dry powder to work.

“At this point, most of the downside risk in the market is priced in,” Hornman said.

To begin August, Friday’s non-farm payrolls will be a much-anticipated economic data point for the week. But before that, the final reading of the ISM Manufacturing Index and Manufacturing PMI is to be held on Monday. Tuesday June brings job openings and drop data.

All three major US stock indexes posted their best monthly gains in July. The large-cap benchmark S&P 500 SPX ended +1.42% up 1% on Friday, according to Dow Jones market data, while the Dow Jones Industrial Average rose 1.4%, helping both book their biggest monthly gains since November 2020. got help. The tech-heavy Nasdaq Composite comp, up +1.88% on Friday, advanced 1.9% to its biggest monthly advance since April 2020.

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