Pictures can say a lot (Still Waiting for that Recession)

At times, a friend, partner, or colleague may pose a question that is so overwhelming that you struggle to articulate an answer. You may resort to dismissing the inquiry as too complex or redirecting the conversation with a counter-question. That's precisely how I feel about the current state of the markets and the economy. My mind is awash with numerous thoughts and connections, making it difficult to make sense of it all. However, using data, charts, and visuals can bring much-needed clarity, allowing you to present a straightforward response with a simple "see?"

To that end, I present the current market situation through four charts, accompanied by brief explanations:

1. Inflation is still the big boss at the Fed, and let's face it, they're still the boss of us all.

The Federal Reserve remains in charge, and their primary focus remains controlling inflation. While inflation has subsided in certain sectors, such as "goods," it persists in others, specifically "services." One crucial area of concern for the Federal Reserve is wage inflation. If wages continue to rise, demand will remain high, making it difficult for prices to decrease in stubborn areas. Consequently, the Federal Reserve may opt to raise interest rates to curb economic growth, risking a recession. The chart below depicts wages in blue and both headline and core inflation in yellow and red, respectively.

2. The market thinks the Fed will drop interest rates in the next few months, but the Fed doesn’t yet agree. Given the above, it’s not a foregone conclusion that they will lower rates. And, at their last Fed meeting, they stated they expected their own rates to stay around current levels until at least next year. The Feds have to raise rates by 0.25% to ~5.125%.

3. Earnings have been stronger than expected on the whole. Now that we are more than halfway through the earnings season for Q1 '23, it's clear that expectations fell too far heading into it. Companies have been able to beat earnings estimates on the whole, and, as a result, they have increased for the remaining companies still to report. However, keep in mind that earnings are still contracting—around -6% YoY—but they hurdled over the low expectations. This is in contrast to weakening economic conditions. For more detailed information, you guys can look at one of the previous posts on top companies' earnings.

And it’s not often you see earnings doing better than expectations, while economic data is also softening. However, I did recently see that margin sentiment data—meaning an analysis of company management team views on their profitability—has fallen, reflecting how slowing economic growth could pressure future corporate margins.

4. The debt ceiling is coming. We are very close to not being able to fund the government after reaching the current debt ceiling of $31.4 trillion earlier this year. We got an updated estimate on how much time—or money—is left before the US government is no longer fully funded. The date was estimated to be on or around June 1. This is on the earlier side of expectations and now forces real discussions between Congress and the President to come up with a solution (we believe it’s likely a temporary one at first in the form of a suspension). In line with our own expectations, the markets did not like the shortened timeline, and t-bills (short-term Treasury bonds) that mature around this date have much higher yields than Treasury bonds maturing in two years or longer, reflecting the risk right now.

I guess I did end up writing my thoughts down here... but the pictures helped me get there. And despite the clear picture, the Fed and the market are still very data-dependent, with clarity on the low end of the historical range. But so far, US companies have navigated the uncertainty well, though they are also becoming less certain of their future.