Market trending down in first week back after end of summer while headlines say all’s well

A few pieces of recent headline economic data suggest the economy is not yet cooling off, which is slightly raising the probability of a Federal Reserve Rate hike in the upcoming September meeting. To stress, the probability increase is slight, at 9.0% up from 8.0%, but it is increasing nonetheless, and a rate increase would push back the timeline for eventual rate cuts “on the other side” of the inflation battle.

*Per CME’s FedWatch Tool, which we track closely and so will be highlighted often in our letter.

Some of the recent pieces of positive economic data include the following:

• Higher than expected ISM Services PMI, which stands for the “Purchasing Manager’s Index” and surveys company purchasing managers about what they see in terms of new orders, prices, supplier dynamics, inventories, and more
• Fewer than expected unemployment claims (data out this morning, 9/7)
• Continued sticky high levels of consumer spending and consumer confidence when compared against the first half of the year

Conditions like these have produced some very rosy economic projections from the usual suspects:

• The Atlanta Fed’s “GDPNow” model, which tracks its expectation of growth, now stands at a projection of 5.6%(!!) growth for 2023. This is…extremely high… to say the least, when compared against a long-term growth model of 2-3%
• Goldman Sach’s recently published and end of summer report which lowered its estimated chance of a US recession within the next twelve months to 15%, which is basically somewhat of a “standard” probability of recession on any given year

Taking all this at face value suggests that the prudent course of action for the Fed may be to raise rates further in the face of continued high prices, and a higher probability of rate increases (or, a lower probability of lowering rates) drags down the price of stocks as investors and traders gauge that companies will have a harder time sourcing capital, will invest less, and will generally experience slower growth. Over the next few weeks we’ll expand on some more “under the hood” economic metrics that suggest maybe things aren’t as rosy as the headlines suggest.

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