We are back to interesting times. After months of weak and lackluster performances, July turned out to be a stellar month for equity markets. The Dow rose 6.3%, the S&P 500 9.7%, and the NASDAQ 12.3% respectively all in the month of July. It turned out to be the best monthly performance since Nov 2000.
Is the bear market behind us? I think so at least for a while. Why do I think so? The market was pricing in a Fed propagated tightening campaign, which also included the Fed’s threat of reversing QE (meaning draining liquidity from the system).
The tightening campaign and a bear market in stocks produced an unofficial technical recession. What do I mean by that? Two consecutive quarters of negative GDP growth qualify for an unofficial recession. But the last GDP was down by .9%. That may be up for an upward revision in which case we didn’t experience a recession at all. Powell and Yellen are frantically trying to convince the public of the new definition of recession.
To be honest none of these things matter: what matters is whether you are paying more than you are earning for goods and services? I think we are. The government is concerned about this and to counter that the Democrat-led congress is pushing for more government spending in the name of “inflation relief”. So what can we expect? More inflation. Will the Fed do anything drastic to solve the problem? Not really.
Just listen to what Jerome Powell told us: the last year-over-year inflation was 9.1%. Yet Powell told us that an effective rate of 2.3% is neutral. The last time the rates were at this level was in July 2019. But then they paused and cut rates all the way down to zero. I am sure they are not going to do that now but at the same time, they are not going to be that aggressive about rates from now on. Remember they told us they would be shrinking the balance sheet by $95 bln by this time? What they’ve done so far is only one-third of the plan.
The Fed will continue its jawboning and inflation will continue to persist. With almost another trillion dollars of new government spending down the line in the name of economic transformative spending, the economy should be buoyant. That should be good for the equity markets. The only question is will this tailwind of additional spending outpace the inflation outlook - in simple terms will there be real economic growth?
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.