Thursday, August 27, 2023
- The U.S. economy grew 1.1% annualized in the first quarter, the third consecutive downshift in quarterly growth.
- Consumers started the year on strong footing as spending on both goods and services added to headline growth. But higher frequency data tell us that consumers have started to slip.
- The biggest drag on overall growth was a decrease in inventories as businesses prepared for weaker demand in the latter part of this year. The good news is if the economy does slide into recession, businesses will not likely have bloated inventories during a downturn in demand.
- The backward nature of the GDP report is possibly misleading for markets as we know consumers were still spending in January, but since March they have pulled back as they get more pessimistic about the future. The latest consumer confidence report corroborates that thesis.
- Bottom Line: The U.S. economy is likely at an inflection point as consumer spending has softened in recent months. The data is setting the Federal Reserve (Fed) up nicely for next week’s meeting. As growth and inflation slow, the Fed can legitimately transition to a pause and then perhaps an outright cut in rates by the end of the year if the economy dramatically weakens.
Out of Sync
The economy slowed in the first quarter of this year and leading indicators suggest further slowing in the balance of 2023. Investors should know, however, that equity declines do not always line up with recessions. The S&P 500 was up quarter over quarter in Q4 1990 and Q1 1991 when the economy was in recession. The equity markets declined in Q3 1990, before the recession started.
Since markets and growth are sometimes out of sync, our Strategic and Tactical Asset Allocation Committee (STAAC) view is equity markets will not likely retest last year’s lows despite rising recession risks. That said, the path to the end of the year could be rocky, especially with potential unexpected shocks that may come out of Washington, D.C., Europe, or China.
We think the U.S. is poised to slip into a mild, short-lived recession later this year. The head fake from last year’s two quarters of negative economic growth and the uncertainty from an aggressive Fed were primary culprits for pushing down the markets last year. Although 2023 has its fair share of risks, we do not think markets will retest last year’s lows, despite the likelihood of a recession later this year. Perhaps the relationship between the equity markets and the 1990-91 recession is most informative for the current outlook.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
Tracking # 1-05368695