Hope all is well with you. Happy Mother’s Day to all the moms. The major U.S. indexes fell for the fifth week in a row after a rapid shift in sentiment sent stocks reeling on Thursday. The major indexes ended with relatively modest weekly declines: –1.5% for the NASDAQ and about –0.2% for the S&P 500 and Dow. With the market’s in turmoil this Mother’s Day, I figured I would turn to TV Mom who is used to handling chaos for some advice. I have broken down this week’s news with some motherly words of wisdom from Ozark’s Wendy Byrde.
The Fed raising rates is not necessarily a harbinger of looming recession. As was expected, the Federal Reserve approved an interest-rate increase of half a percentage point. More increases are still to come. The effects of Fed tightening have yet to be fully felt through the economy, but it doesn’t usually stop economic growth in its tracks. Markets dropped in 1994 and 2018 when the Fed began raising rates. Stocks dropped 8.9% in 1994 and 19.8% in late 2018, but in both cases, recession was not imminent. Stocks rebounded 5.2% and 25.3% respectively over the following six months. Both of those recoveries were sparked by the Fed taking a pause on its rate-hiking campaigns. I don’t predict a pause this time around. Still, I don’t feel this current drop will be accompanied by a recession which means we may be close to the bottom. In the last 60 years, there have been two similar (20%-plus declines) that were not accompanied by a recession (1966 and 1987) the average drop was 28%. To make a serious move higher a catalyst is needed to shift the market’s current mood. If inflation were to moderate (which I think will happen before the end of the year) that will trigger the confidence shift that is needed. Another possible catalyst could be a change in Congress which happened in both 1994 and 2018.
After years of low volatility and the market quickly rebounding from drops the market finds itself in a prolonged correction with tons of volatility. The positive sentiment from early in the week proved fleeting, as the NASDAQ on Thursday dropped 5.0% while the S&P 500 fell 3.6% and the Dow gave up 3.1%. In a year that has featured plenty of volatility, last week’s daily stock-market swings, which included both the largest daily gain and daily decline of the year, may have felt like a new normal. There is reason for concern but don’t interpret it as a sign that a new threat to the market has surfaced. The volatility is an ongoing symptom of the market digesting the Fed rate hikes and higher inflation.
Even with all the negativity there is a lot to feel positive about. Earnings performance continued to improve, as first-quarter profits at companies in the S&P 500 were expected to increase about 9%, based on companies that have reported so far and forecasts for firms that haven’t yet released earnings. The labor market also remains strong. An employment report on Friday showed that the economy generated 428,000 jobs in April. Recessions are usually triggered by people out of work which is just not the case now. Looking back at the recessions that began in 1980, 1990, 2001 and 2007, the unemployment rate bottomed, on average, 13 months before a recession.
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