The Economy is Slowing

The faint caution lights indicating an economic slowdown only a short time back are now beginning to flash brightly.  It seems highly likely the US economy is soon to slow.  Some data even suggest a recession is soon upon us. 

Time for the Fed to Cut Rates

Up until recently, it seemed as if the Fed has accomplished the nearly impossible task of bringing down inflation while maintaining economic growth in the US.  However, the question now becomes, has the Fed kept rates too high for too long? 

Based on recent reports, and barring a reversal of data, it seems likely the Fed will need to intervene before economic concerns materialize into a more significant slowdown.  The markets are currently anticipating the first interest rate cut of this cycle to occur in September.  The Powell Fed has been reluctant to surprise the markets.  The next FOMC meeting isn’t until September 17 and 18.  Anyone else remember inter-meeting Fed movements?    Would such cuts spook the market or be found as welcome relief?

Corporate Earnings Remain Strong

So far, corporate earnings, and perhaps more importantly the outlook for earnings, remains strong.  This is a positive for equity markets.   Eventually stock price follows corporate earnings.  Although we remain bullish on the equity market due to strength of earnings, not all sectors nor stocks are participating in higher revenue and earnings.  This seems to be a bifurcated economy and a bifurcated market.  Higher growing companies, especially those more closely affiliated with the promise of AI, seem to be on a different trajectory – especially compared to those companies catering to those in a lower socioeconomic stance who are disproportionately impacted by the sting of inflation.

Unknowns All Around

Additionally, there are numerous concerns and uncertainties.  These range from geopolitical and political issues to seasonality of historical returns, to a likely change in the trajectory of the economy and Fed.  We must continue to question if any of these issues, or others, may impact corporate earnings.

Putting it all Together

The economic outlook is beginning to falter, yet corporate earnings forecast continue to improve.  All things being equal, a deteriorating economy makes it hard for companies to swim upstream.  Perhaps a series of Fed cuts will stimulate the economy.  This should make it easier for corporations to earn profits which eventually manifest in higher stock prices.        

There are many moving parts and numerous cross currents.  Additional updates to follow.  Long term investors stay tuned.