While inflation is running rampant and geopolitical tensions are at explosive levels, literally, the actual consumer in the US seems to still be doing pretty ok as indicated by the labor market. New jobless claims last week came in at a measly 187k, which is the lowest level we’ve seen in 52.5 years. That number in the peak of COVID was over 6m, so we’ve clearly come a long way in recovering those jobs lost during the pandemic.
Moral of the story: Companies are still fairly desperate for workers and there are 11.3m job openings in the US – that’s 1.8 jobs per unemployed person, which is a record, and is helping drive wages higher, especially at the lower end of the income spectrum and helping offset the skyrocketing gas and food prices.
Price hikes across the board, especially at the gas pump, have attracted the attention of every policy maker in this country – some states are halting gas taxes, others are thinking about giving away additional stimulus to help pay for some of the surging cost, and all investors are looking at what the Federal Reserve is going to do from a monetary policy perspective. The Fed raised interest rates at their last meeting for the first time in over three years and seems like they’re willing to continue raising rates, and being as aggressive as needed, to help combat inflation.
Moral of the story: The Fed should have probably seen the writing on the wall on inflation about a year ago and started reacting at that time. They effectively waited until the last minute to finish their final project for class, are going to have to pull an all-nighter, and the end product is likely not going to be super high-quality – we’re hoping for a B at best.
What’s a yield curve
One of the best predictors of recessions throughout history has been an inverted yield curve. If you plotted out the interest rates for loans of different durations (1-month, 3-month, 1-year, 5-year, 10-year, 30-year, etc.) and connected them, you’ll create a line that’s called the yield curve. Typically, a yield curve goes up to the right – so the longer the loan, the higher the interest rate. When that yield curve inverts, a shorter loan has a higher interest rate and indicates there’s higher risk today than in the future. That yield curve has been flattening for about a year at this point and is currently only 0.17% away from inverting, and it’s not surprising that economists are becoming increasingly worried about a recession on the horizon.
Moral of the story: Unfortunately for everyone, a recession (negative economic growth) combined with high inflation leads to a notion called “stagflation,” which is no bueno because the policy responses to combat inflation will make economic growth slow even further while policy responses to spur economic growth will make inflation worse. It’s what you might call a “lose-lose situation.” But stocks closed out the second winning week in a row driven by two big factors. First, when inflation is running at 7%+ and you’re looking at where to invest your money, putting it into the stocks of companies with growth higher than 7% sounds way better than keeping it in the bank where it’s earning….0.1% and you’re effectively losing money on an inflation-adjusted basis. So, investors are still thinking of stocks as the best place to be because the alternatives are caca. Second, the US consumer continues to feel strong and it doesn’t seem like economic growth is going to completely collapse as an outcome of the war in Ukraine.