Are Fears of a Recession and Continued Inflation Warranted?
We’ve seen quite a bit of volatility in the stock and bond markets in the past twelve months. Many of the market’s ups and downs have been driven by fears of a recession and continued rate hikes. Should you move out of the market or has the market already taken the worst into account?
Zacks Investment Management’s managing director and portfolio manager Mitch Zacks believes it is likely that inflation and the economy will fare better than expected in 2023. That would be a good thing for equities. Several analysts expect the U.S. stock market to be higher by the end of the year from now. We still wouldn’t put all your eggs in one basket, and we expect continued volatility, but the positive sentiment is encouraging.
Mitch’s optimism is largely based on three data points. First, Consumer Price Index (CPI), one measure of inflation, continues its downtrend. The reported decline is likely understated. One third of CPI consists of shelter prices (housing costs for renters and homeowners). Shelter price updates lag by several months. We’ve seen significant declines already in that area that should start to further reduce CPI in June.
Second, M2 money supply has seen the biggest decline in February since the 1930s. Mitch stated, “Changes to the consumer price index tend to lag M2 money growth by about a year or so, which suggests we could see a significant anchoring effect on inflation in the coming quarters.”
And finally, job openings declined significantly. The decline reduced wage pressure, which is good for easing inflation. Luckily, we haven’t seen mass layoffs and hope that will continue to be the case.
All in all, Mitch is optimistic on inflation and recession and believes they will turn out better than currently expected. That's good news for the stock market because current valuations are based on a more pessimistic forecast. You can read Mitch’s commentary here: https://zacksim.com/blog/how-an-inflation-surprise-could-impact-markets/
Whether you should increase, decrease, or maintain your stock exposure depends on your objectives, risk tolerance, and current allocation. We’re happy to discuss your situation in more detail.
The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.