John Mauldin’s “Thoughts from the Frontline” has some nifty charts this week.
In particular, he points out that the Fed raised the fed funds rate going into two recessions – 1973 and 1980. The Fed also raised the fed funds rate immediately before the 1970, 2000 and 2008 recessions although there were a few months of stable (high) rate just before the recession so technically they weren’t raising during the recession.
The stock market responded nastily to all these recessions, along with higher unemployment. The Fed responded by reducing the fed funds rate in all cases except 1980, when the rate was kept high for many months.
The Fed is raising rates into 2 quarters of falling GDP, but it’s not yet certain that the economy has fallen into recession. (Since employment is still strong and the numbers may be revised later.) PCE inflation came in at 6.8%, a 40 year high. The Fed raised the fed funds rate 0.75% again, stopped offering guidance on what the Fed would do next, gave no reassurance that recession could be avoided and when asked about cuts next year pointed to last month’s forecast that rates would rise further in 2023.
The stock market responded with a substantial bounce last week. The SPX and NASDAQ have risen long enough since their nadir in mid-June that the trend is clearly rising. However, it’s nowhere near the “mungofitch 99 day rule.” It could be a bear-market rally head fake which has happened during other bear markets (especially 1973).
Every stock market internal is positive. The Fear & Greed Index is still in Fear but has risen almost up to Neutral.
Treasury bond yields are falling at all maturities (except the fed funds rate, which is rising). Bond traders have been speculating that the Fed will cut rates next year regardless of inflation, which was specifically contradicted by Neel Kashkari.
The USD is falling. Gold, silver, copper, oil and natgas are rising in a reciprocal to the fall of the USD.
The trade is risk-on as stocks and junk bonds are rising relative to Treasury bonds. Copper has stopped falling against gold and is now stable.
The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity has turned negative, which only happens before recessions. The stock market is ignoring that.
If I didn’t know that the Fed is planning to raise rates until inflation drops (which could lead to significant unemployment and a recession) I would say that the charts look positively cheerful.
The METAR for next week is sunny. The stock market seems determined to shake off the high inflation and high fed funds rate data that would normally send it into a funk. As always, the METAR is a short-term forecast and doesn’t predict anything longer than a week.