Our work along with recent economic activity indicators show that the economy continues to grow and the US is likely to avoid a recession in the near term. For example, contingent economic surveys maintain the characteristics of economic growth. Our Economically Weighted Purchasing Managers Index shows that business activity has slowed from last year’s breakneck pace, but is still growing. In the chart below, numbers below 50 indicate a contracting economy, and numbers above 50 indicate monthly economic growth. In the United States, economic growth has been driven by the resilient services sector, which accounts for the bulk of economic activity.
Meanwhile, the frontier of inflationary pressures has subsided. One of the main drivers of inflation over time is the amount of money in an economy relative to economic output. Or, as economist Milton Friedman puts it, too much money chasing too few commodities. As the following graph shows, Broad his money to economic output increased steadily during the previous economic cycle, keeping inflation at around 2% per annum. Inflation spiked about 13 months after an influx of government stimulus boosted the level of broad currency relative to output. This is a good example of the lag between policy changes and their impact on the real economy.
However, the growth rate of money relative to output has stalled recently. This environment, combined with other factors, indicates that inflationary pressures will ease in the coming months. In fact, broader inflationary pressures, such as the growth rate of the broader currency, rising prices for new apartments and used cars, and survey data tracking the number of companies planning to pay or raise wholesale prices, are all suggests that Inflationary pressures are starting to ease. This easing is seen in market-based inflation expectations as measured by the break-even spread for inflation, which has recently returned. Inflation is now expected to average 2.5% over the next five years.
If inflationary pressures ease as expected, inflation-adjusted real incomes and retail spending should pick up, which would be good news for the economy and US households. Still, the Fed’s hawkish tone suggests that tightening will continue as it seeks to lower inflationary pressures even more rapidly.
I think the Fed should take a wait-and-see approach as it has already started raising interest rates and reducing the size of its balance sheet at such a fast pace, but I doubt it will show such patience. We believe that monetary tightening in this environment puts the business cycle at risk.
Our survey suggests that the US economy has avoided recession well so far, but risks to future growth have increased. In addition to her hopes for the Fed’s tightening policy going forward, she notes that the Conference Board’s Leading Economic Indicators (LEI) index has been trending downward since his March. While not necessarily predicting a recession, current LEI trends point to a slowdown in the economy in the coming months and quarters.
Given the combination of these factors, investors believe it is prudent to use strategies that incorporate a tactical component and overweight defenses when necessary. In recent weeks, we have increased allocations to defensive equity sectors and alternative investments such as multi-sector income strategies and managed futures. In addition, we added exposure to medium-duration US Treasuries. We will continue to monitor for signs of a potential recession and take further steps to manage risks accordingly.
The Cash Indicator (CI) helps determine potential volatility. Note that the CI has been trending upwards again recently, although the CI remains in the normal range. The indicator is intentionally designed to be more sensitive to market turmoil and systemic market collapses than the market revaluations that are likely to occur this year. We follow CI closely and adhere to the process accordingly.
The forecasts, figures, opinions, investment techniques and strategies depicted are those of Stringer Asset Management LLC as of the date of publication. Although believed to be accurate at the time of writing, accuracy is not guaranteed and no liability is accepted for errors or omissions. They are subject to change without reference or notice. The views contained herein should not be construed as advice or recommendations regarding the purchase or sale of any investment, and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and income from them may fluctuate according to market conditions and tax treaties, and investors may not recover the full amount invested.
Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than quoted performance.
The securities identified and described do not represent all securities purchased, sold or recommended in a customer’s account. Readers should not assume that their investment in the identified securities was or will be profitable.
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