Attitudes Have Shifted In 3 Major Ways

Stocks closed higher last week with the S&P 500 jumping 2.6%. The index is now up 14.8% year to date, up 23.3% from its October 12 closing low of 3,577.03, and down 8.1% from its January 3, 2022 record closing high of 4,796.56.

Back in February, I wrote: “Attitudes are on the cusp of shifting in 3 major ways.”

I think we are now past that cusp, and so it’s worth an update on those three themes.

1. The Fed Has Become Less Hawkish 

Last spring, the Federal Reserve went into crisis mode over inflation. In May 2022, Fed Chair Jerome Powell first said economic “pain” may be necessary to get inflation down. In June, the Fed hiked rates by an eye-popping 75 basis points. At the time, it was the biggest single rate hike since 1994.

After months of cooling inflation, the Fed’s tone became much less hawkish on February 1, when Powell acknowledged that “for the first time that the disinflationary process has started.“ And on March 22, the Fed signaled that the end of interest rate hikes was near.

On Wednesday, the Fed kept its target range for the federal funds rate at 5% to 5.25%. This pause came after 10 consecutive interest rate hikes since the beginning of the rate hike cycle in March 2022.

The news came after Tuesday’s May Consumer Price Index report, which was the lowest annual reading on inflation since March 2021. It was also a record 11th straight month of decline.

To be clear, Wednesday was not necessarily the end of this rate hike cycle. In its updated summary of economic projections, the Fed’s estimated median federal funds rate for the end of 2023 was revised up from 5.1% to 5.6%, implying that the central bank sees a need for two more rate hikes by the end of the year.

A “key takeaway from the June meeting is that FOMC participants see a more moderate pace of tightening as appropriate now that the funds rate is closer to its likely peak,“ Goldman Sachs’ David Mericle wrote on Wednesday.

The bottom line is the Fed is moving away from emergency-mode. This bodes well for financial markets if it means efforts to further tighten financial conditions are coming to an end.

2. The Economy Has Become Less Likely To Go Into Recession 💪

Coming into 2023, most economists were pretty convinced the U.S. economy would go into recession some time during the year.

TKer readers have long understood the economy has been bolstered by massive tailwinds. These persistent reasons for optimism have kept recession at bay and continue to do so. Month after month, we’ve gotten confirmation job growth remains hot and consumer spending remains strong.

And more and more, economists have adopted an increasingly bullish tone. A June 8 piece on GoldmanSachs.com headlined “Why a US recession has become less likely” captures this sentiment.

Here are some recent news headlines:

“The case for a 2023 US recession is crumbling” - CNN, June 5

“A recession is unlikely to hit the US economy in the next 12 months after Friday's hot jobs report“ - Business Insider, June 5

“What Recession? Economy’s Staying Power Poses Big Questions for the Fed.“ - New York Times, June 8

“Wall Street economists are increasingly less worried about a 2023 recession“ - Yahoo Finance, June 9

“Investors rethink recession plays, boosting U.S. stock market laggards“ - Reuters, June 11

Many economists who have been forecasting a recession have either withdrawn their call or delayed it.

“The risk backdrop has improved, and labor supply has rebounded,” BofA economist Michael Gapen wrote on Wednesday. “Both are contributing to resiliency in the US recovery… We revise in favor of a later, and more moderate, downturn in 2024. Inflation now falls, and unemployment rises, more slowly.”

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Indeed, just because we get a recession doesn’t necessarily mean the economy will be in terrible shape.

The bottom line is that the case for an economic recession remains very weak as massive tailwinds continue to support growth.

3. The Stock Market Is Not Doomed To Crater 📉

The 'most popular prediction' coming into 2023 was that stocks would tumble during the first half of the year before rallying in the second half.

That prediction has been very wrong. In fact, the stock market officially entered a bull market earlier this month while spending almost no time this year in the red.

In recent weeks, the consensus has shifted with strategists across Wall Street revising up their year-end price targets for the S&P 500, including Goldman Sachs’ David Kostin (to 4,500 from 4,000), BMO Capital Markets’ Brian Belski (to 4,550 from 4,300), BofA’s Savita Subramanian (to 4,300 from 4,000), and RBC Capital Markets’ Lori Calvasina (to 4,250 from 4,100). Elsewhere, Evercore ISI’s Julian Emanuel, Stifel’s Barry Bannister, and Truist’s Keith Lerner moved their targets higher.

“With earnings estimates getting less bad and the Fed nearing the end of the rate cycle, it makes sense that equities are finding themselves on a better footing,” Fidelity’s Jurrien Timmer tweeted on Thursday.

Indeed, while the improving outlook for earnings is the simplest explanation for higher stock prices, it’s a welcome development to see that the Fed-sponsored market-beatings may not go on for much longer.

Who knows for sure what stock prices will do in the second half?

The bottom line is that market conditions appear to be improving, and stock prices have been moving up (as they usually do).

Zooming Out

There’s a lot of good things happening right now. The economy is strong, the outlook for earnings is improving, and stock prices are moving higher.

Importantly, all of this is happening as inflation continues to cool, which means we could be nearing the end of the Fed’s market-unfriendly policies.

Instinctually, you may be thinking that it’s during times like this that things go wrong. Maybe so. History is riddled with negative shocks that set back the economy and the markets.

But history also says the economy tends to grow, earnings trend higher, and stocks usually go up.

While it’s never wise to get complacent, there’s also nothing wrong with enjoying things while things are good.

A version of this post was originally published on Tker.co