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Recent Trends in GDP and Consumer Demand

The Fed Reserve and inflation have been primary market talking points. Today we will take a look at recent trends in GDP and consumer demand. While the Fed is doing all it can - with its tools - to put the breaks on consumer demand and inflation, the data - across multiple key indicators - shows clear signs that the economy is starting to slow.

After two consecutive negative GDP growth quarters, The GDPNow forecast for the the third quarter of 2022 has been falling steadily since August when it was projected at 2.5% to sub 0.3% as of last week, Tuesday. We will have a better estimate of GDP for the third quarter by the end of October. The trend and forecast shows consecutive declining growth.

The trend in slowing growth is also reflected by declining activity in inbound containers at major US ports. This is considered a coincident demand indicator and reflective of immediate shifting trends in consumer demand. Global commodity and food prices are showing some signs of price easing but remain high year over year. Jonathan Golub, Credit Suisse;s chief U.S. equity strategist maintains that: "Futures indicate that Food and Energy prices should fall -5.7% and -11.8% by year end 2023, while Goods inflation has declined from 12.3% to 7.0% since February,” he wrote. “Over the past year, Services and Rents are up less than Headline CPI (5.5% and 5.8% vs. 8.5%).”

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Will The Fed Doctors Administer More Medicine to Cool the Economy?

It appears that the Fed Doctors are leaning in the direction that more medicine is needed to keep the economy cool and inflation more tame.

We have maintained for many months now that this would be the Federal Reserve stance until the signs of inflation have shown a pattern of consistent decline. They failed miserably in quantifying the impact of their actions, inundating the economy in a sunami of close to zero interest funds and trillions of stimulus and now they cannot be seen to fail in bringing down "the inflation monster" they contributed in large part to create.

We expect the Federal Reserve to maintain a hawkish stance through this year and into the first half of the next year with the possibility of cutting the size of interest rate hikes as economic signs dictate. We then anticipate the Federal Reserve holding rates steady until a demonstrable period of time has passed indicating that inflation is more tame.

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Earnings, Markets & The Economy

A recent research report released by Absolute Strategy Research revealed that 37% of money managers (who collectively oversee $5.2 trillion in assets) expect earnings to be higher a year from now. 63% expect earnings to be lower. That’s the lowest reading since late 2015.

The economic outlook is fraught with issues that we have discussed at length in prior articles.

a) Consumer sentiment has hit a 10 year low. This is correlated with more cautious consumer behaviour and a decline in spending which will impact earnings.

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The Fight to Bring Down Inflation Will Continue to Shape the Market Narrative

Inflation numbers continue to be the central issue shaping the market narrative. Last week’s market rally is based on the "not yet substantiated" narrative that inflation numbers will come down sooner and will necessitate less drastic action on the part of the Federal Reserve. In the short term, it's a speculative narrative.

The markets are forward looking so speculation is inevitably a component of how markets operate. However, the real determining factor will be the hard inflation numbers. Is inflation trending downwards? To answer this question will take several consecutive months of declining data to validate. Until such time, the Federal Reserve has no incentive - after miscalculating this issue through 2021 - to operate less hawkishly. Its credibility is on the line. As a result, they will look to declining inflation numbers over several consecutive months until they lighten their rhetoric and along with it, rate hikes. Until then, the Federal Reserve has no reason to veer off its already communicated path of more aggressive interest rate hikes.

The daily question and commentary that is in the news headlines - whether we will see a recession or not - is largely dependent on the still "unknown" question of "how long" it will take to bring inflation down and "how high do rates need to go for that to occurr"?

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When Markets Fall, Who do you Listen to?

When markets fall, who do you listen to? This may seem like an odd title for a blog post, but it is an important one from a pyschological, health and financial well being standpoint. When markets fall and the economy experiences a down turn, the mainstream media highlights worst case scenarios and how bad everything can get. It can make your stomach churn if you have money in the markets, even if you have gone through such events in the past. The media is highly trained on how to illicit response with headlines that make you want to read them. That is how they make their money. It is also built into human pyschology that any danger signals trigger the pre-historic or primordial functions of the brain that are about survival. Add a terrible war in Ukraine and ongoing economic cold-war with China and you have a recipe for doom and gloom.

Reading the daily media headlines can be bad for your health. As Baron Rothchild once said "Buy when there is blood in the streets". That is of course much harder to do for the very reasons we are just referencing. Our brains and bodies are trained to "flee" danger, and not walk into it for good reason!

Who do you listen to or turn to when markets are falling is an important question. When you have a professional seasoned financial advisor, you have an objective party to speak with who can share their perspectives about bear and bull markets over decades of experience. When you are in the midst of a bear market, it seems like it will never end. Likewise when you are in a bull market it seems like it will never end. Both statements are false however. No Bull or Bear market is permanent.

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