For the first time in four weeks, equities finished higher in a short 4-day trading week. Fed speakers last week, most notably St. Louis Fed President Bullard, stated that the Fed does not see a recession on the horizon. The economic data would not support that view at this moment. While Housing data did surprise to the upside last week, the majority of the updates disappointed. Existing Home Sales & New Home Sales for May were higher than expected. However, both metrics are down year-over-year versus last Summer. The manufacturing and service indices were lower than expected and declined month-over-month. Both the Chicago Fed National Activity and the Kansas City Fed Manufacturing Index dropped significantly, with the latter turning negative for the first time since May of 2020.
The bigger concern is the drop in the University of Michigan’s Consumer Confidence. The final reading for June showed confidence plummeting to a reading of 50, which is the lowest reading in 40 years. The dislocation between unemployment and consumer confidence is alarming. Typically, when Consumer Confidence declines, unemployment rises. Currently, unemployment is low and this dislocation is similar to the high inflation recessions of the 1970s.
The price of gas remains elevated and could be hampering travel plans this Summer. Of those surveyed in the U.S., 45% said they didn't have any travel plans because they "couldn't afford it." Between high gas prices and inflation, consumers are making conscious decisions to save money, which was the second highest response in the same survey.
Meanwhile, consumption of gas overall remains strong, compared to recent years. Yet, oil production remains below the peak in March of 2020. Basic economics shows us that if demand remains constant or high and supply is low, prices will go higher. However, recent reports by the American Petroleum Institute show that inventory levels of Crude Oil have risen over the last 3 weeks, while economists had expected inventories to have shrunk. This could be the first signs of "demand destruction" caused by higher prices and inflation.
Volumes are typically low the week heading into the July 4th holiday. Yet, institutional traders - pension funds, endowments, etc. - could push equities higher this week as we enter rebalancing season and beaten up equities are purchased. Last week saw U.S. corporations buy back their stock in some of the largest volumes since 2016.
Have a great week!
The current score of our Recession Indicator suggests that there is a moderate probability of a recession in the next 6-12 months. The Indicator declined 1 point last week. It is now at a level of 19.
Note: the National Financial Conditions Index (NFCI) is being substituted for the Adjusted National Financial Conditions Index. The Adjusted index is the same as the former, with the addition of the Chicago Fed National Activity Index and the Personal Consumption Expenditures (PCE) Price Index. This takes into account the elements of the business cycle and inflation into the original NFCI.
The current level of the Wealth Protection Signal is at 43.64 as of Friday’s close on June 24th, 2022. The Signal increased 0.3% from the previous week’s close. Though the VIX (volatility) index decreased, the TED Spread (fear) increased back to level of early may when the Signal first triggered this year. The Signal would have to increase 60% to reach the 2nd trigger level. The Wealth Protection Signal is currently indicating that investors should have a 10% cash-weighting within their respective asset allocation at this time.