The Fed Is Dealing With Mixed Signals

Jeffrey Roach:

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial. For this latest edition of the Street View Podcast, let's talk about the impact from the global synchronized easing. What does it mean for stocks and bonds?

Jeffrey Roach:

So first, most global central banks will ease this year. The European Central Bank, the Bank of England, the Bank of Canada, the U.S. Central Bank, are all on course to ease policy this year, and it will likely affect risk, appetite and bond yields. Central bankers are easing because the pace of inflation is slowing along with increasing downside risks to growth. Now, here's where it gets nuanced, especially in the U.S. Wage growth keeps growing faster than inflation, and consumer spending was fairly solid over the past several quarters. However, we are at this inflection point where conditions have softened so going forward, pay attention to weekly claims numbers, the housing market, and job growth for an early read into economic conditions. Second, markets often recover after the first Fed cut. Based on the last nine major rate hiking cycles since the 1970s, the S&P 500 has generated modest returns over the six months following the first cut with median returns of roughly 7%.

Jeffrey Roach:

Of course, how the economy holds up and if we enter or avoid a recession, will ultimately dictate how stocks perform over the longer term. But I think it's important to remember that markets historically rally as the central bank lowers the Fed funds rate and financial conditions ease. Third, we are getting mixed signals about the outlook. August retail sales were bolstered by online purchases, revealing a more cost conscious consumer. Avoiding traditional department stores, only five out of the 13 categories rose in August as sales were mixed across sectors. The previous month, 10 categories gained sales. Restaurant spending was unchanged in August, as consumers started to pull back on discretionary spending. Department store sales fell for the second consecutive month, putting some pressure on retailers to attract customers. The bottom line is this, the Fed is dealing with mixed signals as they debate the path to the long run neutral Fed funds rate. Consumer spending is growing despite early signs of labor market weakness. So the Fed may end up falling behind the curve again if they rely too much on stale data and not enough on the forward looking outlook. In my Econ Market Minute I'll record at the end of the week, I'll highlight what to watch when seeking global opportunities. But until then, take care.