Summer Economic Slowdown

July 12, 2022

As we look to the start of the second half of 2022, the same trends that were playing out in January are still unfolding, and there is little clarity on the next month, let alone the rest of the year. What we are clear on, however, is the belief that markets are discounting the worst and likely are over-reacting on the downside. This creates short-term opportunities, but also requires patience.

First quarter GDP was just revised for the third, and final, time from -1.5% to -1.6. I have shared that I was surprised how easily economists dismissed the April news of this negative GPD report; now experts are predicting that second quarter GDP may be set for a decline as well. If so, that will make two quarters of negative GDP. It does not matter much if the NBER officially calls a recession. Call it what you will, we are in an economic slowdown.

The fact is, it is a good thing that most everyone is anticipating a recession, because when recessions are anticipated they generally are shorter and less severe. Already, there are plenty of signs that supply chain bottlenecks are easing and that we are globally learning to live with COVID. Both these improvements will help to ease inflation. Another driver of inflation is the oil supply issue, and we can all debate whether- and how- raising interest rates can meaningfully change the dynamics of the global supply and demand for energy.

Our investment outlook is based on the premise that the global economy is in a slowdown that may accelerate before it starts to improve. During this cycle, we will see inventories rationalized across industries, and we may see some easing of the tight labor market. We will see interest rates move up, hurting current bond prices, but also providing opportunities for higher income than we have seen in years. Companies will continue to report slowing earnings growth through the end of the year but may start reporting year-over-year improvements by early to mid 2023. Markets may begin to anticipate that improvement as early as late 2022, laying the foundation for markets to move higher. We are positioning your portfolio with this kind of outlook in mind- looking beyond the slowdown to those industries and companies that are well capitalized and positioned for strength in a recovering economy.

Liz Miller, CFA® & CFP®