Our work and recent measures of economic activity indicate that the economy continues to grow and that the United States is likely to avoid a recession in the short term. For example, coincident economic surveys retain the characteristics of economic growth. Our economically-weighted PMIs indicate that while business activity has slowed from last year’s blistering pace, growth continues. In the following chart, readings below 50 indicate economic contraction, while readings above 50 suggest month-over-month economic growth. In the United States, economic growth has been driven by the resilient service sector, which accounts for the vast majority of our economic activity.
Meanwhile, the peak of inflationary pressures is diminishing. One of the main drivers of inflation over time is the amount of money in the economy relative to economic output, or as economist Milton Freidman put it, too much money for too little. Goods. As the following chart illustrates, the broad money supply relative to economic output has steadily increased over the past business cycle and inflation has held steady at around 2% per year. About thirteen months after the influx of government stimulus increased the level of broad money relative to output, inflation suddenly rose. This is a good example of the lag between policy changes and their effects on the real economy.
However, the growth rate of money relative to output has recently come to a halt. This environment combined with other factors tells us that inflationary pressures will ease over the next few months. In fact, a wide range of inflationary pressures, such as the growth rate of broad money, price increases for new apartment leases and used cars, as well as price survey data wholesalers paid and the number of companies planning price increases, all suggest that inflationary pressures are starting to ease. This easing can be seen in market-based inflation expectations, as measured by break-even inflation differentials, which have recently come down. Inflation should now average 2.5% over the next 5 years.
If inflationary pressures ease as we expect, inflation-adjusted real incomes and retail spending should pick up, which would be good news for the US economy and households. Still, the Fed’s hawkish tone suggests continued tightening as it tries to reduce inflationary pressure further and faster.
While we think the Fed should adopt a wait-and-see attitude after already raising interest rates at a very rapid pace and starting to reduce the size of its balance sheet, we don’t think it will show that kind of patience. . In our view, tightening monetary policy in this environment puts the economic cycle at risk.
While our work suggests that the US economy has managed to avoid a recession so far, the risks to future growth are increasing. In addition to our expectations for Fed policy tightening going forward, we note that the Conference Board’s Leading Economic Indicators (LEI) Index has been trending lower since March. Although not necessarily predicting a recession, the current LEI trend indicates an economic slowdown in the coming months and quarters.
Looking at these combined factors, we believe it is prudent for investors to use strategies that incorporate a tactical component to overweight defensive moves when appropriate. Over the past few weeks, we have increased our allocations to defensive equity sectors and alternative investments, such as multi-sector income strategies and managed futures. Additionally, we added exposure to mid-duration US Treasuries. We continue to watch for signs of a potential recession and will take further steps to manage risks accordingly.
The Cash Indicator (CI) was helpful in helping us gauge potential volatility. Although the IC remains within a normal range, we note that the IC has again tended to increase recently. We intentionally designed this metric to be more sensitive to market dislocations and systematic market breakdowns rather than the market repricing we are likely to experience this year. We follow the IC closely and will respect our process accordingly.
All forecasts, figures, opinions or investment techniques and strategies explained are those of Stringer Asset Management, LLC as of the date of publication. They are believed to be accurate at the time of writing, but no guarantee of accuracy is given and no liability for errors or omissions is accepted. They are subject to change without reference or notification. The opinions contained herein should not be considered advice or a recommendation to buy or sell an investment and the document should not be considered to contain sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate according to market conditions and tax arrangements and that investors may not get back the full amount invested.
Past performance and returns may not be a reliable indication of future performance. Actual performance may be higher or lower than stated performance.
The securities identified and described may not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified has been or will be profitable.
The data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.
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