As we move into the second half of 2022, there are lots of things to worry about. Covid-19 is still spreading, here in the U.S. and worldwide. Inflation is close to 40-year highs, with the Fed tightening monetary policy to fight it. The war in Ukraine continues, threatening to turn into a long-term frozen conflict. And here in the U.S., the midterm elections loom. Looking at the headlines, you might expect the economy to be in rough shape.

There were several important economic data releases last week, with a focus on business spending, consumer and manufacturer confidence, and the May personal income and spending reports. Personal spending growth came in below expectations during the month, echoing a similar decline in retail sales growth in May. This will be another busy week of updates, with a focus on service sector confidence, the minutes from the Fed’s June meeting, and the June employment report.

June was a terrible month, with stock markets in the U.S. and abroad down substantially and developed international markets hit the hardest. The underlying reason? The Fed. With inflation high, the Fed has raised interest rates over the past six months, which has driven the risks of a recession. Still, the economic news is healthy. Companies are hiring, supporting spending growth, and business investment is sound.

We’ve received numerous questions about our inflation outlook over the past few weeks. In some cases, it seems investors are beginning to throw in the towel on traditional asset classes in favor of more inflation-sensitive areas like commodities, real assets, and managed futures, which have had a good run as of late. Before making wholesale changes to portfolios, though, it’s important to understand where inflation may be headed, as opposed to where it’s been.

Headlines are telling us that the Fed let things get out of control, with inflation at its highest level in 40 years and stagflation right around the corner. I would argue that the consensus on inflation could be wrong, mostly because the numbers are suggesting that things have already peaked and will probably moderate as the year progresses. So, let’s have a look at the data and cut through the headlines.

It was a relatively quiet week for economic updates, with only one major data release last week. Existing home sales fell in May, marking four consecutive months of slower sales and highlighting the headwinds for the housing industry created by rising prices and mortgage rates. This will be a busier week of updates, with reports scheduled that will touch on business spending, consumer and manufacturer confidence, and personal income and spending.

Today will not be the usual economic content, as I am out of the office for my mother’s memorial service. She passed away almost a month ago, suddenly from a stroke, after fighting Parkinson’s disease for several years. My dad and my family are doing well, all things considered, but today will be a hard one. 

First, a confession. I handled a recent comment on the blog badly. A reader wrote in with a question that I read as a political diatribe, and I dismissed it without taking the question itself seriously. I realized that my response was wrong and have since apologized, publicly, in the comment section of that post. I owe my readers, if I can respond at all, a thoughtful engagement with their issue, and I failed that standard. I will try to do better going forward.

There were several important economic data releases last week with a focus on housing and the results from the most recent Fed meeting. The reports showed that housing construction slowed in May, reflecting lower demand for housing due to rising prices and mortgage rates. This will be a relatively quiet week of updates, with only one major report scheduled for release.

As we discussed yesterday, the bear is here. We talked about how interest rates, especially the yield on the 10-year U.S. Treasury note, will be determinative as to how long and deep the downturn will be, but noted that there was really no telling. Today, I want to take a look back at history and see if there are any clues we can look at.

We hit a milestone just recently, although it’s certainly not one we wanted to hit. The S&P 500 stock index is now officially in a bear market, down more than 20 percent from its highs. The Nasdaq, of course, has been in a bear market for some time. It is down more than 20 percent, but that is primarily technology, which is notoriously volatile. The S&P 500, which includes the largest and best-known companies across all industries, is a better indicator of market stress overall. The fact that it has moved into the bear phase signifies significant market and economic stress.