The economy roared back from the 2020 coronavirus shutdown at a pace that surprised all, including the Federal Reserve. To slow the hyperinflation caused by trillions of stimulus money chasing too few goods, the Federal Reserve initiated eight consecutive rate hikes. This, of course, prompts new speculations on how businesses and, ultimately, the US economy will be impacted. The aviation metaphor of a “soft” or “hard” landing was adopted by analysts to describe the future trend of the economy. A soft landing would represent a nominal economic slowdown, and a hard landing is the economy contracting into a recession or worse.
For most of 2022, analysts were forecasting a hard landing in 2023 as inflation was increasing at levels not seen since the 1980s, persistent supply chain issues, the Ukraine war, and the Federal Reserve mandate to raise rates to slow the price increases. Analysts feared the worse for 2023, with more optimistic forecasts of a mild recession in the first two quarters of this year.
Jerome Powell, Federal Reserve Chairman, and the Federal Open Market Committee (FOMC) believed the credit markets were significantly underpriced and raising rates to slow price increases would not cause material financial harm to businesses and, ultimately, the economy. Institutional investors were not convinced to play it safe by dumping their stock holdings that sent the major indices into a tailspin for all of 2022, as we reported last week.
So far, it appears the FOMC “Goldilocks” strategy (not too much or too little) of raising rates at every committee meeting in 2022 and again in February to slow inflationary price increases but not too much to send the economy into a recession. The FOMC rate increase policy appears to have accomplished exactly this goal. Since October 2022, the Consumer Price Index (CPI) has hit a ceiling of rapid monthly increases slowing to a rate that is encouraging to the FOMC and analysts.
This morning, the Bureau of Labor Statistics reported that the January CPI index increased 0.5%, slightly above forecasts. Econoday had this to say on the report:
“Core inflation, excluding food and energy, was up 0.4 percent in January, the same as in December, and 5.6 percent year-over-year, above estimates of 0.3 percent and 5.5 percent, respectively.
While the monthly acceleration in the headline inflation rate was a setback after slowdowns from 0.5 percent in October, 0.2 percent in November, and 0.1 percent in December, 12-month inflation rates actually decreased for both the headline and core indexes. At 6.4 percent, the 12-month rate is at its lowest level since October 2021, and at 5.6 percent, core inflation is the lowest since December 2021.
In January, a 0.7 percent increase in the shelter was the largest upward contributor to the monthly CPI gain, accounting for nearly half of the headline index advance. Food, which was up 0.5 percent, and energy, which rebounded 2.0 percent, also boosted monthly prices. Motor vehicle insurance, recreation, apparel, and household furnishings and operations also drove monthly inflation higher, while prices for used cars and trucks, medical care, and airline fares declined.”
CNBC reported this morning that the “Super Core” inflation rate of the CPI, excluding shelter, energy, and food, was now at only a 4.3% annualized rate.
The stock market opened slightly lower today and remained in a tight range as the inflation news was close to investors' projections and, more importantly, without any surprises.
As a result of solid evidence of slowing inflation, investors are not talking so much about a hard landing but now suggesting no landing at all. For airplanes, it is not possible to not land. However, an economy can slow and hover at new zero GDP growth and then take off again. The change in analyst views is primarily due to the strong labor market that appears to be absorbing employees into new jobs faster than they are being laid off. Despite news of over 70,000 employees being laid off by companies including Microsoft, Facebook, Google, and Ford, the unemployment rate actually dropped last month to 3.4%, its lowest level since 1969.
A second factor that is holding up the economy is consumer spending, which declined during the holidays and has now picked up in January. Consumers' budgets are improving due to declining energy and gas prices and affordable fixed housing costs for those that have secured 3% to 4% fixed mortgage rates these past several years.
So, it would appear the economy's landing zone is not at ground zero but slightly higher and may take off from there in 2024.
What Does This Mean to Me?
The S&P 500 continues to improve its technical status of a positive uptrend. Looking at the chart below, the index is solidly above the 20 Day Moving Average (DMA), 50 DMA, and 200 DMA. More importantly, each shorter-term DMA is above the longer DMA, meaning that the last 20 days have been increasing faster than the last 50 days, which has been increasing faster than the last 200 days. An indication the buying of stocks and the rise of the index is picking up speed.
You will also notice that the closing index today is above the previous high point reached on December 1, and the following selloff bottom is above the previous selloff low reached on October 12. Drawing a line from the previous low on October 12 to the next higher low reached on December 28 is a distinct uptrend. Draw a line from previous highs reached on December 1 to the present, is also indicates a positive up trend.
We would support the “No Landing” scenario with the economy slowing and hovering above a zero GDP. If the economy does “land” we would anticipate it to be soft for a short time before resuming a moderate growth trend. Consumer spending is a key foundation of the US economy that will remain resilient as long as the labor market remains strong. We believe analysts continue to underestimate the value of consumer spending (rarely discussed in any research report) that represents 66% of US economic activity. CNBC's entire focus is on corporate profit that, along with government, non-profit, and foreign investors, only represent the remaining 33% of the economy.
It would be more appropriate in tracking the US economy for CNBC to be filming from your living room instead of on the floor of the New York stock exchange and your kids and animals walking in the background than stock traders. However, it might be an interesting reality TV at 5:30am.