Choppy waters

Little bits of hope

The US economy grew by 2.6% in the third quarter, higher than the 2.3% that was initially expected. This is the first quarter of positive growth in 2022 – remember the first two quarters, which showed a slowdown in economic growth, were the textbook definition of a recession. Unfortunately, a large part of that growth was driven by a smaller trade deficit, which is a one-time thing for the quarter and not necessarily indicative of true economic growth.

Moral of the story: Consumer spending is the bulk of what drives our economy. It contributed to 1.4% growth in this latest quarter, but that’s down from 2% in the last quarter, and on its way lower. Consumer demand is getting crushed – just as the Fed is engineering to try and bring down inflation. And the higher mortgage rates are completely halting residential investment – which fell 26.4% in the quarter and isn’t expected to get much better as mortgage rates continue to skyrocket. That being said, this was a little glimmer of hope in the face of otherwise really crappy news everywhere else and markets reacted positively to this better-than-expected economic growth.

Spending winding down

The Fed’s preferred inflation index, the core personal consumption expenditures price index, continued to inch higher in September, up 0.5% from August. Though we’ve been seeing wages increase in the last two years, they haven’t been rising fast enough to keep up with inflation. Remember all that free money people got from the stimmy checks? That cash has run out. Consumer savings, which had increased in the trillions of dollars through the pandemic, have all been spent. And now consumers are turning to credit cards to help pay for the same levels of consumption in the face of higher costs. Unfortunately, that’s just not sustainable.

Moral of the story: The Fed has said they need to see this inflation decrease for several months before they’re going to really shift their stance on tightening the purse strings of the economy. Despite the havoc they’ve created in the financial markets, the same level of chaos hasn’t quite been felt in the real economy (aside from the housing market). Until that happens (which probably doesn’t happen until the labor market crashes to the ground), we might not see inflation truly start to come off.

Earnings season is in full swing

This earnings season hasn’t been great – we’re worried about a recession and profits are getting smashed by higher expenses (inflation and higher interest rates) and a strong dollar (anyone with global exposure is making less money in dollar terms). Big tech, which has already been pummeled to the ground this year, didn’t fare much better with earnings as management tempered expectations for future growth – Meta (shares fell 24% to the lowest price since 2016 on the back of their earnings!)Microsoft (reported slowest revenue growth in five years)Amazon (recorded its slowest growth ever for its cloud business aka the most profitable part of the company that actually makes money) – all reported earnings this week and underwhelmed. Apple wasn’t much better – they reported results for iPhone sales that were weaker than expected, but beat expectations from an overall revenue and earnings perspective – so honestly the company looked like a freaking rockstar in comparison to the rest of the mega cap tech stocks.

Moral of the story: When markets are already pretty pessimistic and you give them earnings to verify their fears, it doesn’t quite go well. So despite stocks already being down 20% this year (and you’d expect some of this weaker performance from the companies would be priced into that already), poor earnings results are just resulting in complete bloodshed while anything that provides a glimmer of hope is resulting in big rewards. Given the negative surprises keep coming from an operational perspective and the Fed continues to do everything in its power to drive us into a recession, markets are in for some rough sledding through the winter.

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