IT’S HERE:  We hit an official “Bear Market” (down 20% from its most recent high) in June, and now we have crossed into an official recession.  The annualized growth rate for the U.S. economy in the second quarter of this year was negative 0.9%.  This follows a reading of negative 1.6% in the first three months of 2022.  That’s two straight quarters of negative growth.  That’s a recession.  All recessions are different, of course, and nothing seems “normal” in the post-COVID lockdown world.  The oddest thing about this recession is that the labor market is strong.  That generally does not happen while the economy is contracting.  The obvious culprit for this particular recession is inflation.  Inflation has led to higher interest rates.  Both of those factors lead to things being less affordable.  When things are less affordable, people buy less, and eventually companies produce less and make less earnings.  For the second quarter in a row, a big reason for the negative readings was inventories.  Companies, hit by supply chain issues and high demand, stocked up.  Now, with inflation hitting, the rate of demand growth has slowed, and companies are selling off inventory without replacing it at the same rate.  Consumer spending was up 1.8% in the first quarter and 1.0% in the second quarter.  But those rises in spending went to goods that cost more and to services (a lot of pent up travel is happening).  Americans in general have more savings than pre-pandemic.  According to Moody’s Analytics, they have about $2.5 trillion more than pre-pandemic.  So there is fuel out there for a recovery, but for the moment people are keeping higher reserves because they are worried about inflation.  That concern needs to dissipate.

ANOTHER THREE QUARTERS OF A PERCENT:  The Board of Governors of the Federal Reserve announced last week that it was raising a key interest rate another 0.75%, just like at their last meeting.  This surprised virtually no one.  They also announced that “ongoing increases” will be appropriate.
(Source: federalreserve.gov/newsevents/pressreleases/monetary20220615a.htm)

U.S. CONSUMER SPENDING AND INCOME RISE IN JUNE:  Personal income increased another 0.6% in June.  Spending increased even more, up 1.1% for the month.  These data points continue to show a resilient population of consumers who have jobs and savings. Spending growth is slowing, and much of the growth is driven by consumers spending more for the same goods and services due to inflation.  As such, the resilience can only last so long. There has to be relief from inflation for the spending data to remain healthy.  And without a healthy consumer class, the U.S. economy cannot remain healthy.
(Source: bea.gov/news/2022/personal-income-and-outlays-june-2022)

STOCKS ROAR BACK IN JULY:  After a six month swoon, stocks roared back in July.  The S&P 500 ended the month up 9.1% while the NASDAQ Composite rose 12%.  The slowing of the economy has given investors hope that the strong medicine of the Fed will not have to last too long.  The overall message of second quarter corporate earnings reports, which report both past earnings and future guidance, have been encouraging.  Can these levels of stock prices hold, or rise from here?  Many are skeptical, and we all should be.  But keep in mind that the “experts” did not predict what just happened in July.  The bottom line is that the experts don’t know.

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

CHINA’S STRUGGLES:  China’s Politburo met last week, and their policy announcements disappointed the public and investors.  The property sector is in crisis as many large developers are in default and/or financial distress.  A group of homebuyers’ recently took the unprecedented step of banding together and refusing to make mortgage payments on properties that developers cannot finish due to their financial distress.  China’s leaders did not announce any aggressive plans to take care of these issues, but instead reiterated their commitment to its zero COVID policy even if it continues to slow the economy.  The announcements by the Politburo all but admitted that China will not meet its goal of 5.5% economic growth this year.  The struggles of the Chinese economy will continue to unfold as the year progresses, and it looks like their are more significant struggles ahead.  Stay tuned.

HOTEL HEALTH:  Hotels is an industry that was decimated by the COVID lockdowns. Currently, hotels seem to be one of the greatest victims of the labor shortage issues. Inflation and higher labor costs can’t help either.  But demand has picked up.  Hotel occupancy is not as robust as 2019, but as compared to the 2000-2020 median and 2019, the numbers look pretty healthy.
(Source: costar.com/article/1909687841/str-us-weekly-hotel-occupancy-reaches-highest-level-since-august-2019)

FRANK, WHAT DID YOU DO?:  So I was walking into a small restaurant to meet a friend for breakfast in West Chester, PA last week.  I looked over to my right, and there was my friend Frank sitting in his chair, and talking to him were two police officers.  My first thought was, “What did Frank do?”  As it turned out, Frank paid for their breakfast, and they were thanking him.  I guess I should think more highly of Frank. 

REUNIION TAG-ALONG: At the request of my wife, I attended her high school reunion this weekend.  She graduated from a small town in Western, Pennsylvania, so we got to bop around Pittsburgh as well as her home town.  Despite being an outsider, it wasn’t too bad.  While we were in Pittsburgh, we went to a restaurant in downtown and sat on the back deck (the weather was perfect all weekend).  This deck had “457 FT” painted on one of the walls.  It looked like the kind of thing you see on an outfield fence at a baseball park, but 457 feet is too far for an outfield fence.  I had to ask the owner.  Are there any baseball trivia buffs who know what that is referring to?

Have a great week!

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”  Aristotle

“A good name is more desirable than great riches; to be esteemed is better than silver or gold.”  Proverbs 22:1

SOURCES: 
IT’S HERE: https://www.wsj.com/articles/us-q2-gdp-growth-economy-11658981184?mod=hp_lead_pos2
CHINA’S STRUGGLES: barrons.com/articles/china-wont-roll-out-big-stimulus-to-boost-economy-zero-covid-policy-remains-a-focus-51659101096

(c) 2022 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg Barclays U.S. Aggregate: This is a measure of the U.S. bond markets.