Federal Reserve Chairman Powell capped off what had already been a not so good month with his remarks at Jackson Hole on August 26. Stocks sold off sharply on the day, with the Dow Jones Industrial Average down more than 1,000 points. The S&P 500 and the Nasdaq posted similar performances. For the month, the S&P gave back -4.2%, the Dow -4.1%, and the Nasdaq -4.6% (Wall Street Journal, August 31).
If anyone still doubted it, it was clear from Powell’s eight-minute speech that team “Transient" has turned vocally hawkish. While they may be no more right now than they were a year ago, the impact of this more aggressive posture has rippled through the economy and served to dampen earlier optimism about a possible Fed “pivot” to a more accommodative rate policy that had been reflected in positive mid-month returns for stocks.
On the fixed income side, bond prices continued to fall and yields rose. An early September Bloomberg headline trumpeted “Global Bonds Tumble into their First Bear Market in a Generation” (Bloomberg, September 2) as the Bloomberg Global Aggregate Total Return Index fell 20% from its January 2021 peak.
Inflation declined, but hardly vanished from the landscape with the Consumer Price Index up 8.5% in July, better than June’s 9.1% but well above the Fed’s 2.0% target (WSJ, August 10). There were, however, signs that it may be set to moderate further. Oil was down for the third straight month and gas prices, which have been contributing significantly to rising price levels, were lower as well, falling for 50 straight days (WSJ, August 4). World food prices fell, too, down -1.9% in August, according to the United Nations, and were at the lowest level since January (Farm Policy News, September 2).
Even as more and more members of the commentariat jumped on the recession bandwagon, jobs remained a major outlier, so far refusing to show much in the way of weakness. The U.S. added 528,000 jobs in July (WSJ, August 5) and another 315,000 in August, according to the Labor Department. The August unemployment rate stood at 3.7% (Bloomberg, September 2), up from 3.5% the month before, but mostly because more people were entering the workforce. While this data tends to be backward looking, these are not the kind of numbers that scream “recession.”
The debate goes on
The discussion over “recession or no” may be getting a bit tiresome, but the end game is not much clearer than it was the month before. Capital spending was strong, outpacing stock buybacks for the first time since 1Q 2021, according to data from S&P Dow Jones Indices (WSJ, August 4). This was in part due to efforts to re-shore production in response to the challenges faced by the global supply chain over the past two years.
On the other hand, equity earnings estimates – which had provided some support for stocks – moved down in the month per FactSet, suggesting a growing pessimism on the part of analysts. Third quarter projections for the S&P 500 fell by 2.5% in July (WSJ, August 7), according to the research group. The 12-month forward P/E stood at 16.7 on September 2 (FactSet, September 2).
Outside the U.S., China continued to struggle with slowing growth. Disappointing July economic data led the country’s central bank to cut two key interest rates in an effort to rekindle growth (WSJ, August 16). The story in Europe was similarly downbeat. Stocks, as measured by the STOXX 600, fell by 5.0% on the month as Eurozone inflation rose to 9.1% in August from 8.9% in July (Reuters, August 31). This is in addition to (or perhaps because of) growing worries about surging fuel prices in the coming winter months.
Adding to the “recession or no” debate, an interesting point on the state of the economy was made in a late month story in The Wall Street Journal which noted a divergence between gross domestic product (GDP) data and gross domestic income (GDI). The former contracted at an annual rate of -1.1% in the first half of the year; the latter was up by 1.6%, also annualized. The piece noted that this divergence was “unusually large” (WSJ, August 29).
Recession, or no? The jury is still out.
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