- by New Deal democrat
There’s no important economic data today, so this is a good time to write about several important developments in the stock and bond markets.
First of all, as many of you may already know, a portion of the US Treasury yield curve, between the 10 year and 3 month Treasuries, re-inverted last week. Here’s what that looks like (dark blue), plus the similar pattern as to the Fed funds rate (light blue):
I put up a post over at Seeking Alpha about how this is not uncommon, and what it means going forward (hint: not so good).
Secondly, especially with the Administration’s latest geopolitical and economic moves, there’s been a little excitement over at the stock market as well. Below is a graph of the S&P 500 Index normed to 100 as of November 1, 2023. I’ve put a line through the level as of November 6, one day after the Election:
As you can see, in the year before the Election, stock prices had increased nearly 40%. That is a huge bull move. While there was a 4% spurt higher on the day after the Election, and several new all-time highs, most recently on February 19, the overall trend in the four months since Election Day has been flat. In fact, yesterday during the day they briefly made a new 3 month low. Should such a low be made at the close of the trading day, that would break the long term uptrend.
There’s also been quite the hubbub in the last few days - particularly by political activists - about the negative GDP prints in the Atlanta Fed’s “nowcast” series, as below:
I suggest taking this with more than a few grains of salt.
The Atlanta Fed’s nowcast of quarterly GDP is an ongoing estimate that changes with each new data point, and can vary widely between the beginning of the Quarter and the end. For sxample, here is the nowcast’s record from Q3 2022, at a time when many observers were predicting a recession:
Note that at the end of August, with only one month to go in the Quarter, it was “now acting” a GDP print of nearly 3%. Three weeks later it was barely above 0%.
What actually happened? It was first reported as up 2.6%, and after many revisions, it is presently reported to have been 2.7%.
Even when the nowcast gets it “right,” as it did last Quarter, there is still a lot of variation in the estimate over the course of the three months:
The bottom line is that it would not be surprising at all if the Atlanta Fed’s nowcast rebounded in the next month just as sharply as it declilned in the last week.
The most up to the moment forecasting tool I have is the “quick and dirty” model using the YoY% changes in stock prices and (inverted) initial jobless claims:
While the four week average of jobless claims is higher - but by less than the 10% necessary for me even to consider it a “yellow flag,” even after their 5% sell-off, stock prices are still higher by 14% YoY. The upturn in claims, and downturn in stocks, must get considerably worse for me to issue a “recession watch,” let alone a “warning.”
It is important to note that sometimes the main factors affecting the economy are intrinsic to it, like wage gains or commodity prices. But there are also individual (or small group of) actors with singular economic power, and the decisions they make can have immediate or nearly immediate impacts on the situation. That was the case with the OPEC price hikes of the 1970s, and Paul Volcker’s single-handed ratcheting up of interest rates that caused the 1981 “double dip” recession.
The new Administration is behaving like the proverbial “bull in a china shop,” in a way it did not in 2017, because at that time T—-p did not know how to use the levers of economic power available to the President. This time around he does, and is ignoring Congress, and previous laws and appropriations passed by it, right and left. Many voters in 2024 probably expected that a 2nd T—-p Administration would look like the 1st, which was a traditional GOP Administration when it came to the economy. Obviously that is not going to be the case.
I am going to continue to look at the data (which hopefully will remain reliable for a long enough time), and not go further than what it tells me in terms of forecasting the near term trend going forward in the economy.
