Weekly Update

Late Cycle Economics and a Stagnant Market

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Published April 21, 2023


Fidelity provided an update on where they see global economics this week. The nation’s largest administrator of 401k plans finds much of the world in late-cycle growth mode where credit gets tighter, earnings struggle, and economic growth slows. The next step is recession, which is what the vast majority of the economic watchers have been projecting for some time now.


Business cycle framework

Schwab, Goldman Sachs, JP Morgan, Fidelity and many others are all singing similar songs of recession. Further, Fidelity argues that investors looking for an easier Federal Reserve interest rate policy (e.g. a “pivot” to rate reductions) will likely be disappointed as a permanent level of inflation remains well above the central bank’s target level.

Persistent vs. transitory inflation

Thus, an outlook for struggling markets and interest rates remaining around 5% or more.

With the load drumbeat of recession sounding for months now, investors remain more pessimistic than optimism. The AAII currently sees a standoff between the two camps with most investors neutral (40%).
As a result, we have the market environment of late where stocks tread water, dips are fairly quickly bought and rallies bring in sellers. Indexes are running in place. The S&P 500 and Nasdaq 100 (QQQ) are both essentially unchanged over the past year, as are small and mid-cap stocks and developed-nation stocks. Bonds and emerging markets have lost ground over the past year.

S&P 500 is essentially unchanged over the past year

It remains a very difficult environment to make money in. Though it is perhaps a calm before the storm with all this sideways trading. The volatility index (VIX) fell this week to its lowest level in 18 months, a sign that investors are not really worried about much, figuring this stalemate will continue. We know that something will break the sideways slumber. But which way?

Something will break the sideways slumber. But which way?


Market Update

Stocks kicked off the week with a slim +0.3% Monday session as investors are looking forward to a flurry of earnings reports over the next two weeks. Tuesday looked the same with indexes little changed as Bank of America and Goldman Sachs offered mixed earnings inputs while Johnson & Johnson beat estimates but saw shares slide. And again Wednesday, no change in stocks despite a range of mostly positive results from companies across energy, healthcare and finance. Of the companies reporting through Wednesday, a hefty 84% had posted results better than estimated. Poor results from high-flying Tesla combined with an uptick in jobless claims and downtick in manufacturing activity pushed stocks lower by -0.6% Thursday to bring the weekly change back to breakeven. Friday brought yet another day of unchanged, low volatility markets. Strong results from Proctor & Gamble, HCA Healthcare, and Lyft offset disappointing reports from Schlumberger and Freeport-McMoRan. Oil prices moved lower during the week as global growth concerns unwound the recent jump in price from the Saudi-led cut in supply. Interest rates nudged upward as investors look to perhaps the final rate hike of the cycle from the Fed in May.

Volatility got sucked out of the market this week as stock indexes barely moved over the five-day span. The S&P 500 (SPY) was left unchanged at a -0.06% weekly tally. The Nasdaq 100 (QQQ) continued to rest after its run in the first quarter showing a -0.62% move this week. Smallcaps (IWM) moved higher by +0.59%.

Warm wishes and until next week.