Sightline Weekly Market Update: What Are Equity Markets Telling Us About Future Economic Conditions?
Fears of recession overtook investors as economic data strengthened the case for an economic slowdown or recession. Equity markets, which tend to be an advanced indicator of future economic conditions, finished out the first half of the year significantly below the start of the year, with the S&P 500 closing out the worst first half of the year since 1970. The TSX was only down 11% in the first half, supported by the 18% weighting in the energy sector, which suffered the least decline of the major indices. The Nasdaq Composite Index fell just over 28% in the first half, well into bear market territory. European equities also finished the week with fears that inflation and rising rates could impact corporate earnings.
Sector performance in Canada for the first half was led by energy, with utilities eking out a small gain and consumer staples closing out flat. All other sectors were negative, with the information technology sector falling 54% and the healthcare sector down 51%. In the US, the energy sector was the only sector finishing the first half positive.
On Tuesday, the Conference Board reported its Consumer Confidence Index dropped to 98.7, down 4.5 points from the May level of 103.2, the lowest level since February 2021. The Present Situation Index, the assessment of current business conditions and labor markets, fell slightly to 147.1 from the May level of 147.4. The sharpest drop came in the Expectations Index, falling 7.3 points to 66.4 compared to the May reading of 73.7, the lowest level since March 2013. Intentions for vacations have cooled in the face of rising prices, although intentions for major purchases of cars and appliances held steady but have eased since the beginning of the year.1
The Census Bureau released the latest trade deficit number for May, coming in at $104.3 billion, down $2.4 billion from April. In the first quarter, the GDP reading was a negative 1.6 and was explained mainly by the trade deficit. With an improving trade deficit, many think it could boost the Q2 GDP reading.2 Also, on Tuesday, the Federal Reserve Bank of Richmond reported manufacturing activity in the Mid-Atlantic region unexpectedly fell in June after falling in May. The latest reading is a negative 19 compared to a negative 9 in May. Shipments plunged to a negative -29 from a negative -14 last month, new orders dropped to a negative -38 from a negative -16, and the index for local business conditions in the next six months fell to a negative -19 from a negative -13 in May. The wage index remained relatively high, indicating companies continue to raise wages.3 The S&P CoreLogic Case Shiller 20-city index showed a slight gain for April, up 21.2% year over year versus 21.1% for March. A separate report from the Federal Housing Finance Agency indicated a 1.6% increase for the month and 18.8% over last year. Tampa, Miami and Phoenix lead the gains as they have in previous months.4
On Thursday, the PCE inflation reading, closely followed by the Fed as the more reliable indicator of inflation, showed inflation rose 0.6% in May. The cost of gas and food was primarily the reason for the increase. The core PCE, less energy and food, rose 0.3%, slightly less than a poll of Wall Street analysts forecasting 0.4%. Year-to-date, the PCE Index increased 6.3%.5 The Labor Department’s initial unemployment claims increased slightly from the previous week, up from 2,000 to 231,000. The continuing claims for all benefit programs for the period ending June 11 increased by 17,678 to 1,315,265.6
To cap off the week, the ISM, Institute for Supply Management, reported its barometer of American factories dropped 3.1 points from May’s reading to 53% in June. Any reading above 50% indicates growth; since March, the reading has been slowly declining.
The latest economic data suggests the economy is slowing. With the Q2 earnings season about to start, any weakness in earnings and guidance will likely increase further pressure on equities and increase volatility in both equity and bond markets in the coming weeks.7
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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