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"The Future's So Bright, I Gotta Wear Shades" Thumbnail

"The Future's So Bright, I Gotta Wear Shades"

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

This week has been concerned with how much the Fed would raise interest rates - this week and into the future.  The market didn't like the answer that it received.  The market and the Fed are currently at odds - the market wants a Fed Put that the Fed is unwilling to provide.  The one-hit wonder Timbuk3 released their only mainstream hit in 1986 titled, "The Future's So Bright, I Gotta Wear Shades," which peaked at #21 on the U.S. charts.  The song appeared in multiple movies in the RomCom and Comedy genres - specifically, one of my favorite movies "Tommy Boy."  I mention that because the song is often misunderstood.  The upbeat tempo and funky harmonica lead the listener to believe the song has positive undertones.  In fact, according to band member and song writer Pat MacDonald, the song is written about nuclear scientist who is aiding an impending nuclear holocaust.  

"I study nuclear science
I love my classes
I got a crazy teacher, he wears dark glasses
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades
I gotta wear shades"

While we're not of the position that we need to worry about a nuclear holocaust, the future is bright - just not the way many might expect.

Here's what we're seeing this week...

I Got A Crazy Teacher, He Wears Dark Glasses.  Whether out of political convenience or just simply getting it wrong, the Fed was behind the curve early in terms of inflation.  In 2021, the S&P 500 Index would pull back about 2-3% periodically, and while it did violate the 50-day moving average once or twice, it quickly reversed - except for September 2nd through October 4th of 2021.  During that period, the S&P 500 stayed below the 50-day for almost a month.  The market figured out quickly that the pandemic was starting to come to an end and inflation was running hot.  Fed Chairman Powell's response just a few days earlier on August 27th, 2021, at the Jackson Hole, Wyoming Symposium was, "Over the 12 months through July, measures of headline and core personal consumption expenditures inflation have run at 4.2 percent and 3.6 percent, respectively—well above our 2 percent longer-run objective.  But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary."  It's at this point that the market no longer believed the Fed had a handle on inflation.  

Per usual, the Fed decided to move the goal posts this week with the latest rate decision.  While the 75 basis point rate hike was largely expected, what was unexpected the change in the Fed's Dot-Plot.  Prior to this week, the top-end rate expected to peak in early 2023 was slated for 4.25-4.5%.  On Wednesday, that top-end rate bumped higher to a median of 4.6%, which sent markets into a tizzy.  The reason - the Fed is now expected to follow-through in typical fashion by hiking rates too much, thereby, pushing the economy into recession.

I'm Doing Alright, Getting Good Grades.  The economic data of late has not been all that bad.  We talked about the year-over-year inflation numbers dropping last week.  This week, the manufacturing data is beginning to look better.  The preliminary data on Manufacturing PMI came in better than expected and higher than August.  The Kansas City Fed Manufacturing Index moved back into positive territory.  Last week, the NY Empire State Manufacturing Index improved by 30 points and almost back into positive territory.  The data on the jobs front has begun to improve.  While Continuing Claims had steadily moved higher in June & July, the last four weeks has seen a move lower.  Similarly, Initial Jobless Claims moved higher in May through July, but has made a considerable move lower in August and September.  The housing data also looked better this week.  

Housing Starts beat expectations for the 1st time in 5 months and were higher month-over-month for the 1st time in 5 months.  Existing Home Sales beat expectations and were nearly even with the previous month.  Lastly, the U.S. Consumer has proven much more resilient than in previous recessions.  Retail Sales were positive in August and have held up well in light of rising inflation and higher interest rates.  As we've pointed out before, Redbook Sales (YoY) tend to fall off a cliff in recessions.  So far, we haven't seen Redbook sales go into negative territory.  While the data doesn't support a lack of recession, it does support a resilient economy being propped up by the U.S. consumer.

The Future's So Bright, I Gotta Wear Shades.  This week's song and the current economic state are opposite mirror universes.  In the song, the scientist is making money and things look good in the short-term, but he's headed for a disaster due to his work in nuclear science (not my words, but the writer's).  Our current economic picture doesn't look great, but it could be improving.  If not, we're certainly closer to the end of the bear market, rather than the beginning.  If we see another drop in inflation for September, it will likely mean inflation may have indeed peaked.  That could mean we are one step closer to the end of the recession than the beginning.  The key now is the Fed.  If inflation has peaked and the Fed continues raising rates, it could push us into a deflationary state and worsen the recession.  The consensus for Real GDP for the 3rd quarter is still slightly negative.  If that number were to bear out, it would mean we are in the throws of a very sight recession by historical standards.  What is encouraging is that our Wealth Protection Signal has not immediately headed higher, but has been range-bound.  Several times over the last month, when it looked like the market would have a meltdown in a single day, equities closed higher than the day's low.  In fact, the components of the Signal have been range-bound - on par with the market.  In past Bear Markets/Recessions, we've seen the VIX & the TED Spread explode over just a few trading days by 200% or more.  That has not been the case this year.  It could be that the Signal is trying to tell us something about the severity of this recession.  The book has yet to be written on this Bear Market.



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