It is Fed week! Invetors expect no change in rates, but everyone is listening closely for clues on path of rates. Investors are not confident the Fed will be able to continue on the same path — more likely, the Fed will keep rates steady for a longer period of time than originally expected.
We are also now firmly in earnings season. So far, reports have been strong, with companies reporting more growth than expected. Overall, analysts expect to see growth of 13% over this time last year, which is above average and a positive sign. Also this week we see some important economic data, including GDP growth for the last quarter of 2024.
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I am currently getting mixed signals. Earnings are good but stocks are still expensive, historically. Employment reports have been mixed — overall it has worsened, but not uncontrollably so —job openings have shrunk and yet consumer spending remains strong. Bankruptcies are up and yet loan defaults have not meaningfully increased. If the data would move firmly in one direction or the other, it would be helpful.
Though I am still on recession watch, I acknowledge that today is an unusual scenario and one which may elude traditional measurements.
Chart of the Week
Looking at earnings, we see that we are currently in a growth period. Earnings tend to decline leading into recessions, as does the price of stocks. However, during expansions, it is very normal for price growth to outpace earnings, which is what we are seeing now. We also see a significant price and earnings decline in 2022, which may well have been a “recession”, similar to 2015 – 2016. That said, both price and earnings can shift quickly.
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