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Mitch Zacks: History and data both signal a soft economic landing

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Sat, Aug 5, 2023 09:01 AM

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In the past, the Fed used rate hikes to tame inflation, often triggering recessions or downturns. Th

In the past, the Fed used rate hikes to tame inflation, often triggering recessions or downturns. This time, other factors may lead to continued expansion. [Mitch on the Markets] How History and Data Both Point to a Soft Economic Landing The U.S. economy grew at a faster pace in Q1 and Q2 than just about everyone expected. History and some recent data suggest it could keep growing. In the post-World-War II era, the U.S. economy has endured 12 expansions and 13 recessions, according to data compiled by the National Bureau of Economic Research. In the decades after the war, the economy followed a familiar pattern – recessions and bear markets were cyclical, typically driven by the Fed raising rates too far to tame growth and inflation.1 But starting in the 1980s through the present day, economic expansions have lasted longer, and recessions and bear markets have largely been event-driven or structural – consider the 2001 tech bubble, the housing crisis and financial meltdown in 2008, and the pandemic. It’s worth noting that the Fed engaged in tightening campaigns in the mid-1980s and mid-1990s, but neither triggered a downturn. And stocks did well. --------------------------------------------------------------- [Discover the Latest Market Trends in our Stock Market Outlook Report!]( To better guide your investing decisions, I recommend reading our new August Stock Market Outlook Report. Today, this briefing is exclusively available to Mitch on the Market readers. This report contains some of our key forecasts to consider such as: - Top-down S&P500 yearend 2023 and 2024 targets - Zack’s view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - Zacks rank industry tables - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download Our Just-Released August 2023 Stock Market Outlook Report 2]( --------------------------------------------------------------- Looking at the graphic below, readers can see that before 1980, economic expansions were relatively short-lived (except for the 1960s). After 1981, expansions have gotten considerably longer, with the previous four lasting an average of 8.6 years. If a recession were to occur in the second half of 2023 – as many economists were and are projecting – then it would be less than half as long as the post-1981 average. [MOTM_08052023_graph1] Source: National Bureau of Economic Research 3 One of the key reasons expansions have become longer since the early 1980s is that inflation has not been much of an issue over the last few decades. In cycles prior to 1980, the Fed would work to choke-off economic expansions because of their objective to choke-off inflation, with the most relevant example of course being Fed Chairman Paul Volcker’s engineered recession in the early 1980s. Just a few months ago, the narrative was that Jerome Powell’s Fed would need to follow in Volcker’s footsteps. But the thinking is starting to shift as inflation comes down meaningfully without much hint of strain in the broad U.S. economy. Consumer spending grew by a modest but still positive 1.6% in Q2, and business investment ticked nicely higher. The jobs market also continues to produce abundant openings and solid wages, which is the opposite of what we would see in a pending downturn. In Fed Chairman Powell’s words, “We’ve seen so far the beginnings of disinflation without any real costs in the labor market,” and “that’s a really good thing.” The Fed’s Preferred Measure of Inflation Fell Below 4% [MOTM_08052023_graph2] Source: Federal Reserve Bank of St. Louis 4 While Job Openings Remain Abundant [MOTM_08052023_graph3] Source: Federal Reserve Bank of St. Louis 5 The case for a hard landing (i.e., recession) is that the Fed today needs to do what it used to do prior to 1980, which is to engineer a recession to bring inflation down. But it looks increasingly like the Fed does not have to do that after all, which could make the current expansion look more like the previous four. Bottom Line for Investors When the Fed successfully raised rates in 1984 and 1994 without triggering an economic recession, the labor market was not nearly as tight as it is today. In other words, the Fed was not worried back then about wage pressures driving inflation like they are now. This might be aptly categorized as the “x-factor” that could influence the Fed to go too far in raising rates. I’ve argued before, however, that there are several supply-side factors that could arguably neutralize any wage-price pressures, like falling producer prices, the removal of stress from global supply chains, falling shelter costs, and the plummeting of M2 money supply which tend to lead to inflation. If these other supply-side drivers effectively offset the effect of wages that are running higher than the Fed wants, then I think it’s entirely possible that the Fed will firmly conclude a recession is not needed to get inflation back down to the target. And that could give the current expansion a lot more runway from here. In the meantime, to help guide your investing decisions, I’m offering our exclusive, [Just-Released August 2023 Stock Market Outlook Report](. This report will give investors a deeper insight into: - Top-down S&P500 yearend 2023 and 2024 targets - Zack’s view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - Zacks rank industry tables - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download our Just-Released August 2023 Stock Market Outlook 6]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Don't put off planning your secure retirement! Talk to a Zacks Wealth Advisor today. [Schedule Your Chat]( [facebook]( [linkedin]( [twitter]( © Zacks Investment Management | [Privacy Policy]( 1[Wall Street Journal. July 27, 2023.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3[National Bureau of Economic Research. March 13, 2023.]( 4[Fred Economic Data. July 27, 2023.]( 5[Fred Economic Data. August 1, 2023.]( 6 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. 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