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<\/figure>\n\n\n\nTrends today appear to be unreliable as reversals occur on practically a weekly basis. U.S. growth stocks have been trending lower for some time, but small cap value has been trending higher since October 2022. Investors are stuck between long-term data that shows the stock market drop on average about 40%, peak to trough, when the U.S. enters a recession. We are only about half-way to that magnitude of correction from the December 2021 market high. There are equally signs of \u2018green shoots\u2019 suggesting a bottoming may have occurred and economic data will accelerate in a positive direction. If this turns out to be accurate and not head fakes, investors will not want to miss out on what could be strong and rapid rally in equities back to prior highs. We know that one group of data and trend lines are lying, but we don\u2019t know which one.<\/p>\n\n\n\n
The mixed messages coming from the Fed are certainly not helping matters. Many market participants and analysts expected the Fed to sound a relatively dovish posture following the February rate hike as it was presumed the Fed had gotten close to their terminal rate in the fight against inflation. Instead, Powell remained rather hawkish and suggested the Fed was more than willing raise rates higher than economists were forecasting. If true, the risk of recession greatly increases as higher rates and tighter financial conditions likely leads to a broad economic contraction. Conversely, if the Fed pivots and communicates a 2.5 percent or even 3 percent core inflation rate is acceptable, the Fed may be very close to ending rate hikes and the potential for a \u2018soft landing\u2019 (i.e., no recession) would greatly improves.<\/p>\n\n\n\n
The only market adage more quoted than \u2018make the trend your friend\u2019 is probably \u2018don\u2019t fight the Fed\u2019. We predict that we are back to a time where the equity market direction is likely to be highly correlated with Fed policy. Two more quarter-point rate hikes and most economists believe a recession may be averted. However, when the minutes of the last Fed meeting were released, it was clear some of the Governors with a vote believed the Fed should hike 50 basis points which explained Powell\u2019s more hawkish tone.<\/p>\n\n\n\n
Courtesy of the Atlanta Fed, the data from GDPNow has been one of the more accurate forecasting tools for economists and portfolio managers on forward GDP prints. This chart just confirms the market confusion hovering between slight contraction and slight growth in the overall economy.<\/p>\n\n\n\n
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