The Markets Cool and it’s a Changing World
United States equity markets cooled from the strong gains seen over the past five weeks. The Dow ended the week down 1.67%, the S&P 500 closed down 1.39%, and the NASDAQ closed down 1.44%. The biggest losers were the Real Estate, Energy, Utilities, and Financials sectors.
There are number of good reasons why investors backed away this past week, not the least of which is the belief that the market was overextended. However, there are potential economic reasons as well. One of the main explanations is the ever present Federal Reserve, with the market continuing to digest the FOMC’s decision not to raise interest rates at their latest meeting—the first pause since beginning their tightening cycle in March of 2022. The halt came with the caveat that there are likely more hikes on the horizon, and we saw some Fed governors reinforce that sentiment last week. Interestingly, the opposite is true across the Pacific with China trying to stimulate their economy. It is not just monetary policy causing concern for investors but the real economy as well. Europe’s economy, led surprisingly by Germany, is slowing, as are parts of the U.S. economy. It is likely that the equity markets will remain restless until the Fed is comfortable with the level of inflation and the future path of interest rates is known with greater certainty.
It is a fascinating time for both the United States and the global economy. Certainly, one of the most interesting global developments occurred in Russia this past weekend. As we have written often, we are not military analysts, but we feel confident enough to write that this war is far from over.
Technological change can be both exciting and scary. International trade can have a similar impact but with even more anxiety. In the past, we have written about the gains of trade and the marriage of industry and technology. These crucial elements of the United States and global and economies will likely be star attractions of the coming political campaigns, so they are worth studying. One of the main reasons these themes can inspire is that they affect jobs, and jobs are a paramount topic in most elections. The marriage of new technology, e.g. artificial intelligence and industry, will, among other things, lower prices, create high paying jobs, and keep production home. Will there be lost jobs? What about the people left behind? American businesses are already experiencing labor shortages. A program that both political parties appear to agree on is a business-government partnership that will train workers and students on how to advance in the new high tech world. There won’t be a lack of jobs, but rather a mismatch between the skillsets of workers and the skillsets required for the jobs created. Solving that mismatch raises overall incomes, reduces government welfare costs, and helps lessen national income disparities. In the end, there will be no choice.
The United States currently appears to be in the most advantageous economic position. China’s recovery is weak and getting weaker, which is creating problems for trading partners across the European Union, as evidenced by Germany’s recent slowdown. Also, persistently high inflation continues to challenge the United Kingdom. Japan seems to have broken through decades of deflationary pressures and is experiencing improving economic growth.
The American economy does not appear to be on the brink of rolling over, but the firm’s view is that the Federal Reserve’s commitment to killing inflation in the U.S. is likely to trigger a recession in the next twelve months. Currently, employment remains strong and is not showing signs of significant weakness. However, it is highly likely that the cumulative actions of the Fed will cause unemployment to rise. We expect market volatility to continue as long inflation remains an unresolved issue for the Fed.
We will pause publishing next week for the July 4th holiday, and will resume on Monday, July 10. We wish everyone a happy and safe holiday!
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