Overall, equities did not react well to the inflation numbers that were released last week. It’s early in the third quarter corporate earnings releases as only 7% of companies having reported, but 69% of companies have reported earnings higher than
expectations. This is below the 5-year average of 77%. And yet, the 3rd quarter GDP estimate by the Atlanta Fed has risen in recent weeks from a paltry +0.3% to 2.8%, due mainly to better-than-expected consumer spending and higher nonresidential investment. If the higher number turns out to be accurate, it will show a current recession that is quite different than previous historical recessions. Unemployment is low and
consumer spending is higher than in most recessions. While the yield curve has been inverted since April 1st (10yr Yield lower than 2yr Yield), what typically follows in most recessions is a further inversion (10yr Yield drops below 3mth T-bill Yield). In 2000, the 10yr/3mth inversion occurred shortly after the recession began in April of 2000. In both the 2008 and 2020 recessions, the 10yr/3mth inversion occurred prior to the recession beginning. This time, while we got close to an inversion on August 1st of this year, the two are now separated by 20 basis points.
September’s inflation data was higher-than-expected last week, but the year-over-year
numbers for both the Consumer Price Index and the Producer Price Index were lower for the 3rd consecutive month. While the data can change quickly, so far, this is not your typical recession. Investors are still on edge as the inflation data solidified the Fed’s
projections for rising rates. There is now a 99% probability of a 75 basis point rate hike next month. In addition, we are closing in on Mid-term elections, which always seem to make things interesting. One silver lining is that equities tend to out-perform post Mid-term elections. Since 1974, the 12 months following Mid-term elections equities have been higher and since 1932, the year following Mid-terms was the strongest year for equities in a four year presidency.
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