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As market conditions continue to change, here are some immediate insights to consider as you enter your weekend.

The microeconomic implications of goods price inflation on both the consumer and businesses are beginning to be seen in corporate earnings reports. For example, reports in recent days from the big box retailers Walmart and Target revealed that while consumers continued to spend at a healthy rate in the fiscal first quarter (ending April 30th), higher input costs caused greater than expected margin erosion and notable misses in earnings. Both companies cited rising fuel and freight costs, however they also noted consumers are being forced to spend more on higher priced food products and less on higher margin general merchandise in the stores.

As inventories had been aggressively restocked throughout the quarter, there was also a need to discount certain items to move this inventory. Adding to these cost pressures was a higher-than-expected return of employees from Covid leave which led to an unexpected increase in labor costs.

Consumer Spending from Goods to Services

We’ve been talking about the hand-off of consumer spending from goods to services for a while but seeing it in action may be a little more disconcerting to markets. This is because it will inevitably lead to comparatively weak results from the previous Stay at Home beneficiaries. An offset is likely to bring better results in various services sectors because they’ll benefit from a broader reopening of the economy and pent-up consumer demand for “experiences” over “stuff.”

We caution that both price pressures in travel/leisure and the apparent beginning of broader layoff announcements in the goods industries will begin to impact demand in services as well. We have also likely seen peak labor market strength with the unemployment rate expected to gradually increase from current levels as the economy slows.

Update on the Fed

The Fed remains focused on getting inflation down, perhaps at any cost. Tightening too aggressively into an already slowing economy increases the likelihood of a policy error. Rhetoric around 75 bps rate increases at upcoming meetings has cooled. However, if inflation persists, talk around moving beyond the neutral rate is hurting market psychology – there is waning confidence the Fed will be able to achieve the soft-landing scenario.

The VIX Volatility Index

Lack of an upside blowout in the VIX Volatility Index can be viewed somewhat positively by market bulls or it can be taken as a more ominous sign that investors have yet to hit the capitulation stage of this downturn. There continues to be a decent number of inflows into equity mutual funds given the downside volatility.

China this Week

China Covid-19 trends are improving, and this is leading to some easing of lockdown curbs in key industrial cities such as Shanghai. This led to a small countertrend rally in Chinese equities over the past few days as other global equity markets are declining sharply. Investors are trying to assess the sustained damage these lockdowns did, not just to the Chinese economy, but also on delaying the improvement of supply chain stresses on the global economy.

Looking Ahead

As evidenced by some credit spread widening and yield curve flattening, recession fears are growing. The more contrarian bullish thesis rests on resilient consumer activity with some policy support coming out of China, particularly an end to Covid-19 lockdowns which may help reduce price pressures and allow the Fed to implement a gradual normalization of monetary policy.


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Meet the Author

Ben Pace

Partner & Chief Investment Officer

Ben is the Chief Investment Officer and a Partner in the New York office. He leads the firm’s Investment Committee and is a member of the Executive Committee. He has more than thirty-five years of experience in investment management. Ben has been featured in the Wall Street Journal and Reuters, and is a frequent commentator on Bloomberg TV and radio, Fox TV and CNBC, appearing regularly on network programs such as Power Lunch, The Closing Bell, Squawk Box, and Worldwide Exchange.

Prior to joining Cerity Partners, Ben was Chief Investment Officer and Head of Global Investment Solutions for Deutsche Bank Private Wealth Management in the U.S. In his role as CIO, he sat on the PWM Global Investment Committee, providing input on the U.S. economy and capital markets. He oversaw the investment strategy and asset allocation for PWM clients in the U.S. As Head of Global Investment Solutions, he brought together PWM’s capital markets and investment capabilities in an effort to provide an effective and consistent experience for clients. Prior to joining Deutsche Bank in 1994, he managed equity income funds for two investment organizations. During his tenure with those institutions, he also served as a securities analyst with a particular emphasis on the financial services and healthcare industries.

He earned his Bachelor of Arts in economics from Columbia University and Master of Business Administration in finance from New York University.

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