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A little over a month ago I published an article on whether the economy is in recession and highlighted the difficulty in evaluating much of today’s economic data.stock market After hitting June lows, it appeared to be recovering before plummeting in August. Another recovery appeared to unfold during the holiday week when Labor Day was shortened, in which he saw the S&P 500 index rise 3.61% in his four days. Then, last Monday (September 12, 2022), the S&P 500 Index added another 1.06% return. This positive momentum hit a wall on Tuesday with the US report on inflation for August with the release of consumer price index data. The report noted that August inflation fell to 8.3% from an annualized rate of 8.5%, but the S&P 500 fell 3.59% on Tuesday. Some key elements of the report saw inflation rise. Core CPI, which excludes food and energy, rose from 5.9% y/y in July to 6.3% y/y in August. Additionally, some service components saw inflation accelerate from the previous month.
Energy has had a large impact on overall inflation, and inflation in this category continues to decline. Lower energy inflation is certainly positive. However, this is a category with opaque sustainability ratings for low prices. Part of the reason is the ongoing conflict between Russia and Ukraine, but another reason is the Biden administration’s continued release of oil from its Strategic Oil Reserves. As the graph below shows, the decline in SPR oil has been significant, with SPR oil inventories now at levels last seen in 1984.
A hint from the Biden administration is that they plan to replenish the SPR in the near future, which could at least help oil prices bottom and energy prices rise.
FedEx (FDX) reported dismal results on Friday, with its shares plunging 21%. The company cited weak demand in Asia and Europe as the bulk of the weakness. FDX is considered by some to be the forerunner of the global economy, given its interrelationship with economic activity and parcel delivery businesses around the world.Do FedEx results point to general weakness in global economic activity? However, some say FedEx’s problems are company-specific. forbes Note:
“The company needs (and has needed) a fix, and is now facing rising costs (inflation), increasing competition (such as improving the US Postal Service and Amazon (AMZN) shipping services), and expanding capital markets. It needs to be addressed: risk differentiation and revenue/profit stagnation.
again, forbes The article shows that FedEx will cut capital expenditures next year while maintaining its existing $1.5 billion share buyback program. On the one hand, it makes sense to buy back shares when the company’s share price is falling. However, FDX could benefit more if those funds were used to improve its operations.
August imports through the US’s largest port in Los Angeles showed another sign of a possible weakening economy. The Port of LA saw its biggest drop since May 2020 as inbound containers fell 17%. The weakness in imports is also reflected in broader global shipment data. The Baltic Dry Index (BDI) essentially measures global freight rates for dry bulk shippers. As global shipping demand increases, so will BDI. The BDI has mostly been on a downward trend since peaking in October last year and showing a drop in demand for shipments, as seen in the chart below.
The chart above also shows the S&P GSCI Commodity Spot Index. Commodity indexes he began to fall in June, suggesting demand is easing. Former Western Asset Management economist Scott Grannis recently wrote an article highlighting why inflation has already peaked. Scott argues that inflation has likely peaked and that the Fed may not be as hawkish as the collective wisdom of the market believes. If the Federal Reserve delays its rate hike expectations, this article shows that this fact could lead to positive economic and market outcomes. The article, “Dollar Strength Informs Powell of Calmness,” is worth reading.
In conclusion, most of the economic data seem to indicate that the economy is slowing down. This is not surprising as the GDP numbers for the first and second quarters are negative, indicating negative economic growth. Exacerbating the data’s assessment is the supply chain disruptions caused by the pandemic. If inflation remains subdued, as detailed in Scott Grannis’ article, and the Fed is approaching a moratorium, a favorable environment could unfold towards the end of the year. As I mentioned in my previous post, midterm election years are the strongest returns for the stock market. This year is one such year, and the post-midterm rally could play out as follows.
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Editor’s Note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.
