We continue to receive client questions about the idea of us being in a recession and what impact that talk has on the market. It is important to point out that the S&P 500 has shown strength the past three weeks, even with the talk about a recession. The technical definition of an economic recession is having two consecutive quarters of negative GDP, which we have had this year. The broad definition of a recession has actually changed some over the years, and we are of the opinion that we are not in a recession. We agree with the broad definition set forth by the National Bureau of Economic Research. In the chart shown in this episode, you will see that the main variables that the NBER uses for making a recession call are all up for the year and have been since the start of the year. We saw a very strong jobs number last week, industrial production is strong, and the consumer is showing a lot of strength, as you will see on the right-hand side of the chart, with retail sales and consumer spending being up as well. It’s not a surprise to see that the market is somewhat ignoring the recession talk because the broad strength of the economy that you see in the data on the chart shown.
This is definitely not a rising tide, raising all boats, kind of economic growth or expansion, if we’re not in a recession. The chart shown in this episode from our research partners at Strategas, shows the different sectors of S&P 500 and their earnings growth in the second quarter. While the total market, which is a good representation of the total economy, is expecting an 8.4% growth in earnings, that’s wildly different across industries. You’ve got the energy industry, which is up nearly 300%, and on the other end you’ve got the financial sector, where earnings are expected to be down 22%. This looks a lot like what you would expect in an inflationary environment. Areas like energy, materials, industrials, and real estate are all doing very well, while other areas like utilities, consumer discretionary, and communications are showing a lot of weakness. This is a winners and losers kind of market, not necessarily a total market rise. This is not really a stock market, but more of a market of stocks where you’re having different results from different areas of the economy.
We got the job number last week, which came out very strong adding 528,000 jobs compared to the estimated 250,000. We saw great strength in the service sectors like education, health services, leisure and hospitality, and professional business services. These are areas we want to see expand since they are the main areas that got hit hard during COVID. Manufacturing continues to increase and has been for 15 straight months. For the first time since 2019, we have surpassed our pre-COVID level. We were on a job growth trajectory before we got hit by COVID, which really caused a pull back, and now we have finally surpassed that, which is great news. However, the labor force came down a bit, dropping 63,000 people from the labor force. On top of that, this is something that the Fed is going to monitor when they consider hiking rates again in September. We saw reports estimating a 50-basis point hike, and then we saw odds go back up after this job report. It’s a good report, but with a little hair on it.
A lot of the economic data mentioned previously was reflected in the market in a positive way. The S&P 500 closed on Friday at a price of 4,145, giving us a new resistance level of 4,180 and a new support level of 4,110. We have been talking about the 50-day moving average over the last couple of weeks, and about how that has leveled off. It has now moved more towards the upside. We’re seeing something similar occur in the 100-day moving day average, which is currently sitting at a price of 4,117. That will be an important number to keep an eye on moving forward, as we’re starting to see these moving averages for the S&P 500 start to level off and, in fact, turn to the upside.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.