Recession Talk Fades Away

Stocks opened higher this morning (Dow +82 pts; SPX +.3%; Nasdaq +.7%). Commodities are mostly trading lower. WTI crude oil is hovering around $74/barrel without much momentum, probably due to China’s rather uneven recovery from Covid. No matter, the average price of gasoline in California remains near $5/gallon. The bond market is roughly unchanged today. Both Fed rate hike expectations and inflation expectations are driving the bond market bus. At the moment, it looks like both of those factors are petering out. If that assessment is correct, bonds are probably undervalued. It’s true that interest yields are at long last fairly attractive across CDs, Treasuries and corporates, but we’re still waiting for bond prices to rally.

The narrative continues to shift for investors, with an increasing number of economists and equity strategists anticipating a “soft landing” for the economy. Rather than inflation, they’re now talking about disinflation. Rather than fretting endlessly about the Fed, they’re paying more attention to resilient economic data. Economist Ed Yardeni believes we’re moving past the downturn and have now entered a “rolling recovery.” He thinks the S&P 500 Index can continue to rise over the next 18 months. Former PIMCO CEO Mohamed El-Erian, who was until recently in the recession camp, now says investors can’t “get in the way of the soft landing narrative.” The fact is that inflation is falling but growth hasn’t cratered. As long as that continues to be the truth, recession is tough to forecast. Goldman Sachs Chief Economist Jan Hatzius just reduced his estimated probability of a US recession starting in the next 12 months to 20%. “The main reason…is that recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”

Earnings Season is upon us and we’re just beginning to get a glimpse into how Corporate America is faring. Last year, sales and earnings estimates for S&P 500 companies were cut sharply as high inflation, high interest rates and slowing growth took a toll. Profit margins across most sectors and industries fell. But over the last few months Wall Street analysts have begun to revise 2023 earnings estimates higher. We know that first quarter results were a bit better than expected, and the second quarter may also surprise to the upside. Zacks Investment Research expects results to “reflect a stabilizing earnings picture.” The bar is low and for the most part, conditions have stopped deteriorating.