This article was originally published May 23, 2024. It has been updated through June 30, 2024.
In conversations with clients we are often asked about the “recession” or “bear market in equities”; neither question is correct. Moving beyond our anecdotal evidence of misconceptions among investors, on May 22, 2024, The Guardian published results of a Harris poll they sanctioned that takes the issue head on. Here are a few misconceptions they uncovered, to which we will briefly respond to as we have with our clients – with the basic facts.
- 55% of Americans believe the economy is shrinking, and 56% think the US is experiencing a recession. The U.S economy grew 2.5% in 2023, which follows 1.9% growth in 2022. For the first quarter of 2024 growth slowed to 1.4%, but the Fed’s GDPNow Model is currently estimating second quarter growth of 2.2% per their June 28 update. There is no economic shrinkage in any of these metrics, and even if there was it is the job of the National Bureau of Economic Research (NBER) to make the official recession call (which they have not). The last official recession was declared by NBER in 2020 during COVID.
- 49% believe the S&P 500 stock market index is down for the year. The S&P 500 is up 15.3% for the year-to-date through June 30, 2024. This follows a gain of 26.3% in 2023. The last annual loss for the S&P 500 was the 18.1% decline in 2022.
- 49% believe that unemployment is at a 50-year high. Unemployment is at 4.0% through the May report. This is actually near a 50-year low.
- 72% believe that inflation is increasing. Inflation peaked at 9.1% during COVID. It has since declined to 3.3% in May.
Chart Source: New York Times using Bureau of Labor Statistics data
It is obvious (and a bit concerning) that 50% or more Americans do not read the news or at least do not follow the economics and markets pages. The only thing we can concede from these misconceptions is that inflation, though falling, still remains too high. All in all, though, the economic strength we highlighted in the face of near-record low unemployment bodes well for stocks – as it has over the past year and a half. Assuming we continue to make progress on the inflation front the next shoe to drop should be interest rates, a reduction of which which should be conducive for the stock market and certainly so for bonds. Cautious optimism is warranted.
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Technical Terms:
The term federal funds rate refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
The Atlanta Fed GDPNow model is a real-time econometric model which forecasts GDP growth in the current quarter.
The Consumer Price Index (CPI) is a measure of the monthly change in prices paid by consumers. The CPI consists of a bundle of commonly purchased goods and services. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
Citigroup Economic Surprise Index represents the sum of the difference between official economic results and forecasts. With a sum over 0, its economic performance generally beats market expectations. With a sum below 0, its economic conditions are generally worse than expected.
