by Franklin J. Parker, CFA
It is Fed week! The Federal Reseve meets this week, and though everyone expects them to keep interest rates steady, Powell’s commentary on Wednesday could easily push markets around. Investors have been forced to adjust their expectations for rate cuts. Originally, the expectation was that rates would begin to fall in summer, but that has been pushed to the fall of this year.
Last week’s data didn’t help matters: economic growth posted lower than expected for the first three months of the year, and personal consumption expenditures (which is the Fed’s preferred measure of inflation) posted higher than expected. In all, the Fed has a ways to go to get inflation below 2% without a recession.
We are at about the halfway point in corporate earnings, with mixed results. Overall, the 500 largest companies are expected to deliver mediocre earnings growth over this time last year. That is better than a contraction, but not by much. Companies have struggled to grow profits in this environment — in fact, the largest contributor to earnings growth so far has been health care and energy, which tend to be defensive sectors.
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I am again reinforcing my cautionary view. While it does appear the economy is sputtering, it hasn’t fallen into a recession just yet. There is a possibility (though a small one, in my view) that the Federal Reserve will pull off a so-called “soft landing” and get inflation below their target while avoiding a recession. That said, the data is generally not positive. How all of this affects your portfolio is very dependent on your individual goals, and we would love to discuss that with you.
Chart of the Week
This week, we look at a breakdown of the recent economic growth figures for the first quarter. As expected, trade pulled growth down a bit. Of most interest to me was the slowing of retail sales. I have consistently said that the US consumer is keeping the economy afloat. If slower retail sales trend even lower into Q2, the economy will struggle to remain on a growth trajectory.
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