Economic Commentary – Confusing Times

On both a YTD and a full 12-month basis, the broad market is still up substantially.  If nothing else happened for the remainder of 2024, we’d say it was a “good” year in the market.  Nonetheless, the reality is we are being whipsawed;  we may see a recession, or we may see a resumption of the general upward trend that the two charts demonstrate, or it may be a flat year, or we’ll get a little of all the above. 

Contradictions Abound

We are at a point when conflicting pressures are butting up against one another and need to be resolved.  Let’s quickly consider some recent economic data points.

• The total volume of international trade increased in June showing that total trade is up 6.7% from a year ago.
• But, the national ISM manufacturing index was below forecast in July and is signaling contraction.
• Additionally, the new orders index came in lower than any month in 2023.
• On the other hand, the ISM services index has returned to expansion territory after what was a very tepid past few months.
• On the employment front, the employment index has been signaling contraction for six out of the last eight months.
• And yet, a “core” measure of payrolls actually increased.
• The July employment report showed that job creation is decelerating, even though there were still payroll gains.
• Nonetheless, nonfarm productivity rose at a 2.3% annual rate in the 2nd quarter of 2024.
• At the same time, the unemployment rate rose to 4.3%.
• Inflation remains significant in the services industries where 11 out of 18 services industries reported higher prices for the last month.
• Across the country, personal income rose 0.2% in June, making it 4.5% higher over a full 12 months.
• Finally, the Fed’s preferred inflation measure shows 2.5% inflation for the last 12 months (June through June) vs a 3.2% rate for the previous 12 months.  Similarly, “core” prices show 2.6% inflation vs 4.3% for the same measure in the preceding 12 months. 

If you’re confused, that’s the normal response to the data.  The data points above were not released by government agencies in the same order we presented them.  We rearranged them to demonstrate clearly just how confusing issues are today. 

Where Are We Going From Here

Are we heading up or down?  The future direction very much depends on the timeframe you consider.

Over the next 6 months and beyond, where we go from here will depend on how the Fed responds to the inflation data and the size of the money supply, and whether 2025 brings significant increases in taxes and regulatory burdens. 

Over the next 2 months, where we go from here will depend on what the market believes the Fed will do, what the market believes will be the election results, and how world agitators will act.

To understand the difference between what will happen over the short-term vs over a more extended period of time, we need to realize that economic and stock market growth ultimately are determined by the profitability of the major companies in the economy.  Long-term, as profitability increases, economic growth occurs and stock prices increase. 

But the stock market is always trying to predict what that direction will be; it is a forward-looking evaluation process.  Those predictions are not always accurate in the short-term, and they are often influenced by unexpected headlines and news stories.

Without trying to wade into the merits and the nuances on either side of the political debate, it is still an objective observation that one side states it wants to substantially increase taxes and regulations should they sweep all branches of government, while another side states that it wants to reduce taxes and regulations should they sweep all branches of government.  Now, if the election produces split results, we’re likely to get a compromise blend of each side’s policies.

The actual results of the election will determine the outcome of these significant economic factors over the long-term.  But until the election results are known and the winners actually start implementing policy, the stock markets are left trying to predict that outcome. Every political speech, poll result can have an outsized impact on the market’s predictions. Hence, volatility in the short-term.

The Fed also plays a part in this, both long-term and short-term.  When the Fed makes decisions about interest rates and the size of the money supply, we have real world decisions which can be assessed.  If the Fed allows excess inflation or if it keeps interest rates too high too long, then economic growth will be diminished.  Both extremes are bad for the economy and therefore for markets.

But until the Fed makes those decisions, the stock market also tries to predict what those decisions will be.  Every sentence in the minutes from Fed meetings and every word uttered by Fed Governors in interviews is analyzed for hints at what the future direction will be. 

It is this process of markets trying to discern the future which inevitably produces greater short-term volatility than long-term volatility.  The more transparent politicians, election results and Fed decisions are, the less volatile the market is.  But when the markets are left to trying to predict, based on opaque statements or inconclusive news reports, they often overreact and can do so in either direction – up or down. 

The third component in all of this, as we’ve indicated above, is what happens on the world stage vs what is anticipated to happen on the world stage.  Long-term, peace is good for economic growth, and war is bad.  Short-term, the stock markets are trying to predict whether war or peace will prevail.  This imperfect ability to predict the long-term outcome adds to short-term volatility.

Change Is Inevitable But Cannot Be Predicted

Hopefully, by now, you have a sense that trying to predict the next market move is a fool’s errand.  The market’s recent moves, which we chronicled above, are evidence of that.  Markets have pivoted and will continue to pivot at a moment’s notice.  Market timers lose, and have always lost, because there is no reliable way to accurately assess the long-term results based on the limited and often inaccurate information received in the short-term.

This does not mean that investing in stocks is foolish, that somehow it is a giant exercise in gambling.  Over the very long-term, the future direction of stocks has been consistently positive.  This has been demonstrated by many academic studies – most easily read in Jeremy Siegel’s book, “Stocks For The Long Run” (now in its 6th edition). 

This is also demonstrated by a longer view of the S&P 500 below.