Growing recession fears rattled markets this week as investors fretted over whether the Federal Reserve’s on-going tightening policy will lead to lower demand for goods and services. Consumers have continued to spend despite higher prices, but they are increasingly being forced to be more economical, and use savings, in recent months as inflation erodes their buying power. While goods spending has weakened substantially from its pandemic highs, this week’s ISM Services Index showed that services activity remained particularly strong in November. Consumers continue to enjoy post-pandemic experiences, helped by strong jobs growth and easing supply chain concerns. Hopes for additional signs of slowing inflationary pressures were dashed on Friday when the wholesale price report surprised to the upside. The November PPI index increased 0.30% for the third month in a row, beating expectations of 0.2%. Analysts had hoped that this week’s PPI and spending data would be weak enough to fully cement a downshift in Fed policy–which the reports failed to do. With the risk of a surprise from next week’s CPI report or Fed meeting, traders opted to bank recent gains, sending the S&P 500 down -3.37% for the week.
Services are In, Goods are Out
Business continues to boom for the services industry as consumers continued to enjoy all the experiences they missed during the pandemic. Services activity strengthened to 56.5 in November, up from 54.4 in October. Numbers above 50 indicate expansion while numbers below 50 signal contraction. The report showed employment rebounding, rising to 51.5 in November, and reversing October’s decline to 49.1. Supply chain problems also continued to ease with the business activity/production gauge rising to 64.7 from 55.7. Providing color to these figures, business managers commented, “new business requests are solid, with costs rising steadily for materials, meals and lodging.” Services account for about 60% of GDP compared with about 32% for goods production (with the remainder going toward structures, such as buildings and bridges), and while strong spending on services should help offset weakness in manufacturing, the strength of the report, along with observations made along with it, are likely to concern the Fed at a time when they had been considering pumping the breaks.
Producer Prices Heat Up
The producer price index, a measure of wholesale prices, rose 0.30% in November. That was above estimates for a 0.20% monthly gain. November’s unexpected rise was driven by a 38% surge in wholesale vegetable prices which in turn pushed up the food index by 3.30%. Although the gain in vegetable prices was notable, food prices were up across the board. The gain in the food index offset the -3.30% drop in energy costs. The drop in energy was driven by a decline in home heating oil and gasoline prices. However, with winter approaching, that could reverse course as we head into the coldest part of the year. Core PPI, which excludes volatile food and energy prices, rose even more significantly, 0.40%, exceeding estimates of 0.20%. At the sector level, services inflation beat out goods inflation, up 0.40% and 0.10%, respectively. Overall, the report points to persistent inflation as November marked the third month in a row that headline PPI rose 0.30%.
Final Thoughts
It was a choppy week for markets as investors braced themselves for next week’s Fed meeting and trove of economic reports on consumer spending and inflation. The elation during November over a potential shift in Fed policy has been blunted in recent weeks as a series of stronger than expected reports on jobs, inflation and service activity have raised the possibility that the Fed’s terminal rate may need to be higher than markets have been prepared for – raising the risk of a recession along with it. This week’s data was a reminder of just how sticky inflation and the consumer’s propensity to spend remains, creating an increasingly precarious situation for the economy. Higher prices and confidence over the strong labor market has resulted in consumers spending down their savings and tapping their credit cards. As of October, the personal savings rate stood at just 2.30%, well below the long-term average of 8.90% and last year’s 7.30%. Meanwhile, credit card balances increased 15% YOY in the third quarter – its largest increase in over 20 years. Consumers are not only continuing to drive inflation with their purchasing, but they are increasingly doing so with a smaller and smaller safety net coupled with greater leverage. To control inflation, the Fed needs to reduce consumption, ostensibly by softening the labor market, but given that the consumer accounts for 70% of GDP and that the consumer is nearly tapped, the Fed now faces a very narrow window within which to land this economy. It is a truly unenviable position for the Fed, and markets will be hanging on every word coming out of the final FOMC meeting of the year, detailing the Fed’s expectations for 2023.
The Week Ahead
It’s a make or break week for a year-end Santa rally. The Fed takes center stage as it holds its rate-setting policy meeting where it is widely expected to step down from a 75 bps hike to a 50 bps hike as well as release economic projections for 2023. Also, a hot November PPI will keep traders on their toes as they pour over the November CPI Index for signs that inflationary pressures continue to ease. Retail sales round out the week’s news with high hopes on the Street and retailers alike for a very merry shopping season.
In the News: Probity Advisors, Inc.
This week, one of our advisors, Tyler Ozanne, Certified Financial Planner®, was featured in an article on personal finance website Bankrate, titled, “What to Invest in During a Recession,” that was published on December 6th, 2022. Tyler has been featured as a personal finance expert in a number of media outlets including the Wall Street Journal, CNBC, Financial Advisor Magazine, Barron’s, and Investors Business Daily.
Tyler addressed a combination of factors that have been top of mind for market watchers and investors including (1) the current environment of low unemployment and high inflation and (2) a hawkish Fed that has signaled a desire to do what it takes to curb inflation even if it means pushing the economy into a recession. Many people are understandably concerned.
James Royal interviewed Tyler for this piece given Tyler’s expertise as a financial planner combined with his more than 15 years of experience helping individuals, families, and businesses plan for and achieve their financial goals. The article explains that a recession often makes investors overly conservative. Royal notes that the best long-term course of action is the opposite: becoming more aggressive. Royal explains that fear often gets in the way during a market downturn, but after stock prices have fallen, investors will pay a lower price for future growth.
Tyler Ozanne shares his perspective in the article, noting that, “Once we know we are in an economic recession, the equity investment markets are probably closer to the bottom than they are to the top in valuations – and many times those markets are already well on their way in a rebound.” Tyler added, “In other words, once we know we are in a recession, it is too late to flee to safety – you should have done that already.”
The article states that a recession is a time to prepare for a rebound during a downturn in the markets, but it also means the economy is slowing which could lead to higher unemployment and other adverse economic factors.
Investors have several options to balance the potential for financial distress with investing opportunities while keeping emotions in check. Tyler advises investors to stick with their long term plan, highlighting the value of a diversified portfolio to help weather the market’s turmoil and sharing that investors should have a long-term investment strategy or plan and stick with it no matter what the economy is doing.
Tyler also advises investors to stop watching the market, reminding investors that “historically, there are way more positive years in the investment markets than there are negative years.” Tyler added, “In a recession, and corresponding negative market environment, it is good to remember that better investment days are probably ahead.”
Tyler concluded by sharing the importance of seeking out a smart advisor to help investors through turbulent times, stating that “having an unbiased party speak reason, logic, and strategy in an emotionally charged period of time can save investors from making mistakes that could dramatically affect the long term impact on their investment outcomes.”
You can read the full article here, and if you have any concerns about your financial plan, the economy, or your investment portfolio, please feel free to reach out to one of our advisors directly or call our office at (214) 891-8131.