Mid-Year Economic Review: Managing Through Inflation While Maintaining Growth

The Trillion Dollar Question (when I was growing up it was the Million Dollar Question): can the Federal Reserve (the FED) find a path to a soft economic landing? Prior to the pandemic our economy was on solid footing and growing nicely, however, COVID changed everything. As we emerged from the pandemic, we realized the full effect of disrupted supply chains and excess stimulus…INFLATION! The FED is late to the inflation game, and while attempting to quell it without stifling growth, has caused a great deal of volatility in the markets. Coupled with the war in Ukraine, there are economic challenges continuing to develop on the horizon. The FED’s assumption that they could battle inflation with a gradual tightening of economic policy has been replaced with an aggressive increase in interest rates, and a reduction in bond purchases, in the hopes of reducing the money supply in our economic system. The FED’s projections are that they will reduce their balance sheet by $522.5 billion this year, which is a 5.87% decrease. In 2023, the FED projects a 13.6% decrease ($1.14 Trillion).

Historically, the economy is very resilient, and we feel it is too early to start bracing for a severe recession. Growth is starting to slow as it appears the FED is doing their job, albeit a little late. Persistent inflation is the fly in the ointment when it comes to a soft economic landing that doesn’t eliminate growth. Our balance sheets are much stronger than the last time we saw this type of inflation, both on a personal as well as a commercial standpoint. Jobs are plentiful, and U.S. nonfarm payrolls increased by 372,000 in June. In addition, U.S. corporations are still making money. The results of the first quarter S&P 500 earnings report, were an annualized growth rate of 9.13%. The second quarter earnings kick off this week, and we expect growth to slow slightly, but year-over-year earnings to remain positive.

Inflation appears to be peaking, which is a great sign. If this hypothesis holds true, we may be setting up for a solid second half of the year. If instead, inflation persists to remain at elevated levels, the likelihood that the FED can pull off a soft landing remains more challenging. Remember, not all recessions bring upon a negative stock market: four out of the last nine recessions, the stock market experienced positive returns.

Investment Tip During Volatile Market Environments: This may sound too simple but, buy solid companies that make a profit and pay a nice dividend to shareholders. The steady (boring) names will hold up much better and offer you risk-adjusted opportunities for stock market gains over the long term.

If you have any questions, please don’t hesitate to contact your Bank of Jackson Hole Trust & Wealth Partners Team.