Anthony Saglimbene, a global market strategist at Ameriprise Financial, joins this week’s What Goes Up to discuss his views on that. The highlights of the conversation were edited. You can subscribe on Apple Podcasts or wherever you prefer.
You say that good news is bad news for the market.
Over the last couple weeks, the markets have settled into the idea of A, “are we headed for a recession?” and B, “is it going to be prompted by the Fed raising interest rates too aggressively?” The hotter the economic news is, the more likely it is that the Fed will need to raise interest rates even more aggressively. The unemployment rate held steady at 3.6% for the third month in a row after the May employment report where we created 385,000 jobs. The employment backdrop is very strong according to all accounts. It implies that the Fed may have to raise interest rates more aggressively if the labor market remains strong, as long as economic activity is moving above what consensus estimates are.
You would expect the market to react negatively to data that comes in hotter than expected, as we move through the next few weeks and months. The data that comes in a little bit weaker, but not too weak, would be welcomed with enthusiasm. We call it a Goldilocks scenario where economic momentum is declining, but not so much that a recession starts to set in. It is a tall order but we are in the market environment.
If inflation moderates, what will that mean for markets in the second half of the year?
A: The consumer is in good shape with high savings rates and low debt levels. They are starting to use revolving credit a little bit more. Consumers are in very good shape. As long as the labor market is in good shape, I think you will see a shift in consumer behavior. They are spending less on goods and more on food and energy, and as that wave of travel begins to ebb in the summer, maybe that will change. If inflation pressures can moderate and employers don’t cut back on hiring and consumers don’t cut back on spending, then I think the Fed has a pretty narrow path to start slowing the pace of increases. The opportunities in the stock market have been created. The stock market is pricing in a recession by the end of this year and early next year. I think the stock market can recover in the second half of the year if the Fed can land this plane and get a soft landing.
Earnings are the only thing we haven’t talked about. Earnings estimates have not been coming down, so that has us a little bit more concerned. I think the market reaction to the fact that analysts are going to need to adjust their earnings could be a little bit negative.
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