The stock market declined -1.3% Friday and -1.2% from a week ago, snapping a four-week win streak. Inflation cooled in July and may even have peaked but that does not mean the worst of the financial economic turbulence is behind us, and it’s prudent to expect current conditions to worsen.
Here’s perspective on current financial economic conditions, if you’re a retirement investor or building a legacy.
The Conference Board Leading Economic Index (LEI) has a long history of plunging a few months before a recession, and that is precisely what the LEI is doing now, as is shown in the blue line in this chart.
The LEI decreased by four-tenths of 1% in July 2022 to 116.6, after declining by seven-tenths of 1%in June. The LEI was down by -1.6% over the six-month period from January to July 2022, a reversal from its +1.6% growth over the previous six months.
“The US LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” said Conference Board economist, Ataman Ozyildirim. “Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy.”
The Conference Board projects the US economy will not expand in the third quarter and could tip into a short, mild recession by the end of 2022 or early 2023.
Long-term investors must always strive to deploy assets fully mindful that the timing of the next stock market decline or surge is virtually impossible to predict. However, predicting that the U.S. will grow once more after the current turbulence subsides is easier to forecast, partly because the U.S. has a history of recovering from recessions. If you are investing for retirement or to build a legacy, these long-term economic fundamentals should drive your investment strategy.
If the Federal Reserve raises lending rates by +75 basis-points on September 28, as it previously indicated it would, then the yield curve will be inverted. That means 90-day Treasury Bills would yield more than 10-year Treasury Bonds. Inverted yield curves, in modern history, consistently have been followed within months by a recession and bear market.
Uncertainty about inflation and Fed tightening may continue to eat into the month-long gains that preceded this week’s loss, until the next Fed policy meeting September 20-21. This bear market may not be over.
The Standard & Poor’s 500 stock index closed this Friday at 4,228.48. The index lost -1.3% from Thursday and is down -1.2% from last week. The index is up +61.6% from the March 23, 2020, bear market low and down -12.6% from the January 3rd all-time high.
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