The latest economic indicators have inspired a new vibe. But will this rising tide lift all boats?
Our Top Market Takeaways for July 21, 2023.
Market update
What is behind the summer vibe shift?
A year ago, the U.S. was in the midst of a “vibe-cession.” Even though businesses were hiring and debt defaults were low, the economy wasn’t good, or even fine.
Inflation was surging. Gasoline prices were high. The housing market was at a standstill. The stock market was down and crypto prices had collapsed. Consumer sentiment (as measured by the University of Michigan) hit its worst levels on record. That means that, last summer, U.S. consumers felt worse about the economy than they did during the COVID lockdowns, the Global Financial Crisis, the Tech bubble-bust, or the Volcker recession.
This summer, we are seeing a big positive vibe shift. So why is everyone feeling better all of a sudden?
Let’s start with what hasn’t happened. We still haven’t had the recession that many thought was inevitable. The U.S. government reached a benign agreement to raise the debt ceiling and avoid a default. The March bank failures haven’t led to a material credit crunch. Neither have high profile problems in office buildings in San Francisco, Chicago, or New York (at least not yet).
Now, a look at what has happened. Inflation is coming down (~3% year over year). So are gasoline prices (~$3.55 per gallon). Home prices are rising again (after 8 months of declines starting in July 2022). The stock market has rallied to within 5% of its all-time high, and even crypto has bounced back. Consumer sentiment has seen one of its largest year-on-year jumps on record.
Consumer sentiment jumps as inflation cools
This chart describes consumer sentiment and inflation using the Umich Consumer Sentiment Index and the headline CPI, YoY% change data. For Umich Consumer Sentiment, the line started at a high level at 96.3 in February 2017. It stayed flat until it reached 101 in February 2020. Then it fell dramatically to 71.8 in April 2020. Then it bounced back to another high at 88.3 in April 2021. Then it dropped to the floor to 50 in June 2022. At the end it bounced back a bit and ended at 72.6 in July 2023. For the headline CPI, YoY % change, the data point came in at 2.5% in January 2017. It stayed relatively flat until it dropped to 0.1% in May 2020. Then it went all the way up to 9.1% in June 2022. At the end, it trended downward until the last data point which was 3% in June 2023.
Labor supply continues to recover (the labor force participation rate for prime aged workers is the highest it has been since 2002), and worker earnings are finally outstripping inflation. The pile of excess savings that households accumulated during the pandemic has been slowly melting away, but research from our own JPMorgan Institute shows that they still have more money in the bank than they did in 2019. Millennials are even starting to move out of their parents’ basements despite a housing market plagued by historically poor supply and low affordability.
Funds from the Bipartisan Infrastructure Bill are flowing into the economy from projects as grand as upgrading the Golden Gate Bridge in San Francisco to as humble as adding traffic lights to Federal Road in Brookfield, CT.
The Inflation Reduction and CHIPs Acts are encouraging investment in manufacturing facilities, and artificial intelligence applications are already set to boost productivity at businesses from auto dealerships to e-commerce platforms. Microsoft, one of the most valuable companies in the world, soared to a new record high this week after announcing prices for its suite of AI products.
This isn’t to say that risks have disappeared. Manufacturing activity is weak. Interest rates are higher. Banks have tightened lending standards and will likely have to fight to retain deposits. China’s reopening has been sputtering, and European economic data has been disappointing. But this year has already exceeded almost everyone’s expectations, and it seems like there is still room for things to keep getting better, not worse.
Investment Implications
Let the good times roll
Markets, as they tend to do, didn’t wait for the vibe shift to adjust. Throughout the year, equity markets have been rallying because the outlook was improving. After a nearly 20% gain so far this year for global equities, we aren’t surprised that many people feel like they have “missed it.”
But instead of asking “how long can the good times last,” we think investors should instead consider that for the U.S. economy and markets, “the good times” are much more common than the bad.
A history of S&P 500 bull and bear markets
The chart describes a history of S&P 500 bull and bear markets and it’s done in a clustered column format. The first bear market started in 1956 and continued for 15 months and had a -18% drawdown. Followed by a bull market that started in 1957 and continued for 50 months for a +114% gain. Followed by another bear market that started in 1961 and continued for 6 months for a -27% drawdown. Followed by another bull market that started in 1962 and continued for 43 months for a +103% gain. Followed by another bear market that started in 1966 and continued for 8 months for a -20% drawdown. Followed by another bull market that started in the same year 1966 and continued for 26 months for a +58% gain. Followed by another bear market that started in 1968 and continued for 18 months for a -33% drawdown. Followed by another bull market that started in 1970 and continued for 32 months for a +89% gain. Followed by another bear market that started in 1973 and continued for 21 months for a -45% drawdown. Followed by another bull market that started in 1974 and continued for 74 months for a +204% gain. Followed by another bear market that started in 1980 and lasted for 20 months for a -20% drawdown. Followed by another bull market that started in 1982 and continued for 60 months for a +304% total gain. Followed by another bear market that started in 1987 and lasted 3 months for a -33% drawdown. Followed by another bull market that started in the same year 1987 and continued for 31 months for a +81% gain. Followed by another bear market that started in 1990 and lasted 3 months for a -19% drawdown. Followed by another bull market that started in 1990 and continued for 114 months for +545% total gain. Followed by another bear market that started in 2000 and continued for 30 months for a -47% drawdown. Followed by another bull market that started in 2002 and continued for 60 months for a +121% total gain. Followed by another bear market that started in 2007 and continued for 17 months for a -55% drawdown. Followed by another bull market that started in 2009 and continued for 131 months for a +528% total gain. Followed by another short bear market that started in 2020 and continued for 1 month for a -34% drawdown. Followed by another bull market that started in the same year 2020 and continued for 21 months for a +106% total gain. Then followed by the most recent bear market that started in 2022 and lasted 8 months for a -24% drawdown. There is an arrow pointing to the left explaining that the left-hand axis is the magnitude of bull & bear markets in terms of % of total gain or total drawdown (S&P 500 total return). There is an arrow pointing to the right explaining that the right-hand axis is the S&P 500 index level (log scale). There is also a shaded line in the background which is the S&P 500 index from 1956 to 2022. That line has generally been trending up from the beginning till the end. The first data point came in at 47.51 in August 1956 and the final data point came in at 4397.45 in April 2022.
Since World War Two, the economy has expanded almost 90% of the time, and bull markets last about four times longer than bear markets. Being close to all-time highs is also an insufficient reason to shun equities. The average one-year return from when the S&P 500 is within 5% of an all-time high is 7.6%, which is only slightly lower than the 9% average from any random starting point.
If anything, the vibe shift is the latest illustration that sticking with an investment plan is the most repeatable way to achieve investment goals. Not many thought that 2023 would end up being a great year for investors, but if the gains so far merely hold, it will be. Let the good times roll.
All market and economic data as of July 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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