The Dog Days of Summer
Markets seem to be feeling the end-of-summer jitters. For example, stocks have been wobbling back and forth. The S&P 500 had a three week run of gains before finally pulling back the week ending August 19th. Meanwhile, bond yields have seesawed, and some of the biggest moves have come from commodities as the energy crisis in Europe wears on.
With Labor Day on the horizon and the dog days of summer nearly behind us, the mood of investors seems to be looking for the promise of a new season. As the calendar turns, here is what we learned this summer, as told by investor fears we’re hearing:
“We’re already in a recession.”
Our take: While U.S. growth has “technically” contracted the last two quarters, the labor market tends to provide a better signal for the state of the economy. And from this lens, workers are still on strong footing. The latest jobless claims report actually fell, signaling there were less people seeking unemployment benefits than the week before. Couple that to July’s blockbuster jobs report, with 528,000 jobs added to the U.S economy, and you’re looking at a pretty healthy labor market. Recession risks are real, but we don’t think we’re already in one.
“Okay, but the Fed’s going to cause a recession.”
Our take: It’s possible, but the July FOMC meeting minutes revealed that Jerome Powell and the Federal Reserve are well aware of the risk of overtightening now that the policy rate is in the neighborhood of “neutral.” We look forward to seeing how Powell wrangles the monetary policy message post Labor Day, given that the recent risk asset rally has helped undo overall tightening—which could galvanize a more hawkish stance ahead.
“Inflation is just going to keep on climbing.”
Our take: The evidence is compounding that price pressures are peaking. In recent weeks we’ve seen a trifecta. Following a recent U.S. CPI report, existing home prices and auto prices are falling at their swiftest pace since the pandemic shock. And the price of gasoline has fallen below $4 nationally for the first time since March. Fed policy is well at work.
That said, inflation is still way too high, and its impact is everywhere. It has even inspired the Biden Administration to name its latest spending package as the Inflation Reduction Act. Whether a misnomer or marketing magic, it remains to be seen if the act will have a meaningful impact on reducing inflation.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
