What do inflation numbers say?
Inflation numbers confirm market assessment that the Fed is headed to the first reduction in interest rates at their September meeting. The Fed is scheduled to meet in August, but markets feel the reduction in interest rates is more likely in September. The day before, we received the first numbers on GDP growth for the 2nd quarter indicating stronger economic growth than economists expected at 2.8%. Some might say this is a goldilocks economy with inflation declining and economic growth continuing at a higher-than-expected level. Common wisdom says that the stock market movements are about 6 months ahead of the actual economic stats and is anticipatory. Markets as a whole are smarter than economists who are correct 50% of the time. You just don’t know which 50% are correct at any given time. A rate reduction to me, would be surprising in a Presidential election year right before the election will be controversial for sure.
The stock market rotation is continuing unabated. As markets feel more certain about the next interest rate move lower, small and medium size company stocks, more dependent on the benefits of lower interest rates because of variable borrowings, stand to benefit more than large capital companies. The rotation is dramatic as small cap stocks gains during the last two weeks are 5 times greater than large cap stocks. Today confirms that divergence. It is amazing how quickly this rotation has occurred. Don’t blink because you might miss it. This demonstrates and confirms the value of diversification in a stock portfolio and that timing the market is problematic. At the same time, interest rates from 9 months to 30 years. The yield curve inversion is rapidly shrinking. Analysts are assessing the primary forward indicator of a recession-an inverted yield curve-is now being questioned. Why an indicator that has foretold almost every recession doesn't seem to be working anymore.
Of course, we can still have a recession as the Federal Reserve predicts a recession in 2025.
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