Federal Reserve & The Conference Board forecasting a recession this year
Christopher Norwood • April 24, 2023

Buy good companies on sale whenever you find them

Market Update

The S&P 500 lost 0.1% last week to finish at 4,133.52. The Nasdaq fell 0.4%. The S&P 500 is still well ahead on the year, but the rally hasn’t lifted most stocks. Bloomberg reported Friday morning that 10 stocks accounted for 6.5% of the 8.5% gain year-to-date. Those 10 stocks are the mega-cap tech stocks that did so well during the bull market run from 2017 through 2021. The strong start to the year has pushed the S&P to 18.3 times 12-month forward earnings. The index began the year trading at 16.7 times earnings. The long-run average is 15.5 times.


Longer term the S&P has fallen 1% over the last two years, according to Deutsche Bank’s Jim Reid. He points out that the poor performance coincides with inflation rising above 3%. The fear is that higher inflation will continue to lead to poor stock performance. Reid points to the period from 1968 to 1982 as precedent. The S&P 500 went nowhere over that period.


The S&P has risen 0.6% so far in April, on track for its smallest monthly change since May 2022, according to Barron’s. It would be only the fourth time in five years that the index moved less than 1% in a month. The VIX finished the week at 16.77. It hit 16.17 during the week, its lowest reading since 2021. The VIX measures the expected volatility of S&P 500 options over the next 30 days. Volatility is a major input to option pricing. Options buyers aren't willing to pay much to hedge their stock positions. Stock investors are complacent.


The VIX has fallen for five weeks in a row. It dropped 34% over that period. The VIX is trading near its lowest level in 17 months. There have been 10 similar declines since the March 2020 low. A spike in volatility has usually followed, according to Frank Cappelleri of CappThesis. The VVIX index (the VIX of the VIX) has stopped falling. The VVIX leads the VIX. That the VVIX is no longer falling indicates that the decline in the VIX is probably over. Cappelleri points out that a volatility spike usually coincides with a stock market decline.


The stock market is showing no signs of an imminent decline. The bond market is signaling recession. “The MOVE index is quite high (recession territory) and is consistent with a volatile economic climate and financial shocks whipsawing Treasury yields,” writes Stan Shipley, an economist at Evercore ISI. (The MOVE index stands for Merrill Lynch Option Volatility Estimate. It is the bond market counterpart to the VIX.) “The MOVE, as a measure of rate volatility, is screaming cognitive dissonance,” writes Harley Bassman, the inventor of the Treasury market gauge. “Stocks and credit are smoking cigars on the top deck while the rates market is running for the lifeboats,” he wrote recently.


The bond market is usually right when stocks and bonds disagree on the outlook. The stock market looks as if it will test 4,200. It might push as high as 4,325 in the short term. The bond market is suggesting that the stock market will test the October low. It should be an interesting quarter or two.


Economic Indicators

The economy continues to show signs of weakening. The U.S. leading economic indicators index fell for the twelfth month in a row. It dropped by a greater-than-expected 1.2%. It fell 0.5% the prior month. The index is down 4.5% over the last six months. It fell faster over the last six months than the prior six months. The LEI is at its lowest level since March 2020. Weakness among the index’s components is widespread according to the Conference Board. The Conference Board is forecasting a recession by the middle of the year.


Housing starts dropped to 1.42 million from 1.43 million. Building permits fell to 1.41 million from 1.55 million the prior month. Building permits are a leading indicator. Meanwhile, jobless claims continued to rise last week. Jobless claims rose to 245,000 from 240,000 the prior week. Continuing jobless claims are rising as well. Continuing claims were 1.87 million last week, up from 1.80 million.


The Atlanta Fed GDPNow tool is forecasting first quarter GDP of 2.5%. The Fed is forecasting a recession later this year. The Fed and the Conference Board are in agreement. Earnings estimates have fallen but are still too high if there is a recession.


A Market of Stocks

I had two people ask me last week if it was a good time to invest in the stock market. They are concerned about the economy, the banking system, and the stock market. They know I think a 15% to 20% pullback this year is likely. They were surprised when I told them that it’s always a good time to buy good companies that are on sale.


We can’t predict what the stock market will do in the coming weeks and months, not with any certainty. I track interest rates and earnings because they drive the stock market in the long run. The business cycle is real. Different sectors and industries prosper during different times in the business cycle.


Understanding where we are in the business cycle helps me find good companies on sale. It always helps to have a treasure map when you’re looking for treasure. And there is always buried treasure in the stock market. Sometimes there isn’t much. Bull markets and high valuations make the search harder. Other times treasure is laying around easy to find. Bear markets make treasure hunting easier.


Norwood Economics currently owns several stocks trading with single-digit price-to-earnings ratios. All our stocks are inexpensive compared to the market and their own trading history. We are researching other single-digit P/E stocks. We are also hoping to buy more of what we already own at lower prices.


Buy good companies on sale whenever you find them. Ignore what you think the market might do. Buying a good company at the right price allows you to earn an acceptable risk-adjusted return. It may take a few years, but the returns will come.


Regards,


Christopher R Norwood, CFA


Chief Market Strategist

The Jobs Report Friday Could Spark a Rally or Sell-off

By Christopher Norwood • September 2, 2025
Executive Summary The S&P 500 finished down 0.1% at 6,460.26 last week The S&P is up 9.8% on the year. Industrials and Communication Services are leading the way Personal income rose in line with expectations for July, climbing 0.4% up from 0.3% the prior month A weak payroll number on 5 September means a Fed rate cut on 17 September Unemployment is expected to rise, but it is still low relative to history Wage growth close to 4% will make it hard for inflation to fall to 2% The predictions market has the odds of a recession at 8% The ICE BofA US High Yield Index spread is near all-time lows A bear steepener is increasingly likely. A bear steepener is when the yield curve falls at the short end but rises at the long end

One of Financial Planning's Most Important Inputs is the Expected Average Inflation Rate

By Christopher Norwood • August 25, 2025
Executive Summary The S&P 500 rose 0.3% last week to close at 6466.91 The CME FedWatch tool initially raised the chances of a September rate cut to 84.7% The stock and bond markets opted to buy Fed Chairman Powell’s Friday morning speech Investors now seem certain that the Fed will start cutting again The current five-year breakeven is 2.48% The 10-year breakeven is 2.41% The core Consumer Price Index (CPI) is 3.1% Disinflation appears to be over as the inflation rate is no longer falling The St Louis Fed’s Financial Stress Index is negative 0.8153. A negative number means below-average financial market stress The real 10-year interest rate is falling. Money is getting cheaper. The Fed’s balance sheet is shrinking, but is still 22% of GDP An indebted economy can’t withstand high interest rates  The Stock Market

Overvaluation is a Poor Market Timing Tool

By Christopher Norwood • August 18, 2025
Executive Summary The S&P 500 rose 1.01% last week to finish at 6,449.80 The stock market keeps hitting new highs Market strategists are expecting earnings growth to accelerate in 2026 Margins remain near record highs Corporate profit margins will likely take a hit from tariffs Passing tariff costs on to the consumer means raising prices Core CPI rose by 0.3% in July The PPI jumped 0.9% last month, the largest monthly increase in more than three years Buffett says it’s dangerous when the market cap rises to more than 140% of GDP. Currently, the ratio is above 200%. The massive increase in the Fed's balance sheet over the last 25 years has led to financial asset price inflation The Stock Market

More Unfavorable Economic News

By Christopher Norwood • August 11, 2025
Executive Summary The S&P 500 rose 2.43% last week, climbing to 6,389.45 Interest rates didn’t move much last week The economy is slowing according to the Chicago Fed National Activity Index (CFNAI) Real final sales to Private Domestic Purchasers are slowing The Institute for Supply Management (ISM) Services index fell from 50.8 to 50.1. The index is only two-tenths away from showing contraction The employment sub-index of the Services Index report was also weak The prices paid sub-index continues to climb Norwood Economics manages its clients' diversified portfolios with a focus on the long run The Stock Market

Uncertainty Remains Extraordinarily High

By Christopher Norwood • August 4, 2025
Executive Summary The S&P 500 fell 2.4% last week to end at 6,238.01 The S&P 500 is up 6.06% year-to-date Foreign Stocks in developed countries are leading among major asset classes Foreign stocks are inexpensive compared to U.S. stocks The jobs report was weak with a 258,000 downward revision for May and June Unemployment is likely to rise if job growth doesn’t accelerate Rapid-fire tariff changes make it difficult to predict the impact of tariffs on the U.S. economy Tariffs are a tax that someone has to pay Initial jobless claims are a leading indicator Inflation remains elevated Three more chances for the Federal Reserve to cut rates this year Stagflation is a feared outcome of the new tariff regime Uncertainty remains extraordinarily high Interesting Charts The Stock Market

Forewarned is Forearmed

By Christopher Norwood • July 28, 2025
Executive Summary The S&P 500 rose 1.5% last week to finish at 6388.64 The impact of tariffs is expected to become more noticeable in the second half of the year The S&P price has outpaced profit growth The economy is still growing, but more slowly Initial jobless claims show that the labor market remains strong Gasoline demand is down, suggesting the rate of consumer spending growth is slowing The Fed meets this week but isn’t expected to change the funds rate  Two Fed governors may dissent on Wednesday. It has been 30 years since that happened The market continues to rise despite the uncertainty

Inflation Expectations Continue to Rise

By Christopher Norwood • July 21, 2025
Executive Summary The S&P 500 rose 0.6% last week to finish at 6,296.79 The 2-Year trended lower, ending the week yielding 3.88% The 10-year Treasury yield ended the week at 4.44% Investors are nervous about tariffs and their impact Tariffs are coming directly out of the pockets of the US businesses that import the goods Rising inflation expectations only increases the chances of higher inflation and interest rates Continue to buy good companies on sale

Tariff Uncertainty Still Dominates

By Christopher Norwood • July 14, 2025
Executive Summary The S&P 500 fell 0.3% to close the week at 6,259.75 We would rather own the German economy than Nvidia Consumer spending is weakening The consumer price index report will be released on Tuesday Economists believe that tariffs will cause prices to rise Economists believe that tariffs will slow the economy The jobs market is stable. The unemployment rate is low. Earnings estimates are falling more than is normal There are still good companies on sale The Stock Market

Diversification Critical in the Coming Decade

By Christopher Norwood • July 7, 2025
Executive Summary The S&P 500 rose 1.7% in a holiday-shortened week, finishing at 6,284.65 Volatility continues to fall from its elevated levels in early April The S&P is up 6.76% year-to-date. Industrials are leading the way, up 13.40% Price determines returns when buying an asset  Diversify away from a concentrated U.S. large-cap stock portfolio Job growth has been holding steady for almost a year now Analysts have been raising earnings estimates recently 90-day tariff suspension ends on Wednesday The Stock Market The S&P 500 rose 1.7% in a holiday-shortened week. The Nasdaq rose 1.6%. Both indexes set new record highs with the S&P reaching 6,284.65 on Thursday afternoon. The jobs report out Thursday spurred the S&P higher. The index gapped up at the open, closing Thursday up 0.83% (see chart below). The S&P 500 is up 26% from the selloff low on April 8, while the Nasdaq has surged 34.9%.

The Fear Gauge has Fallen

By Christopher Norwood • June 30, 2025
Executive Summary The S&P 500 rose 3.4% last week, climbing to 6,173.07 The Magnificent 7 are outperforming the S&P 493 by over 18% since April The Cboe Volatility Index (VIX) fell as low as 16.11 last week Investors seem unconcerned about tariffs and war Treasury interest rates are starting to fall The Fed has little reason to cut if unemployment isn't moving higher The stock market is at record highs Corporate bond spreads are tight, meaning credit is abundant The dollar has fallen by around 10% in 2025 Inflation is expected to move higher because of tariff The Stock Market The S&P 500 rose 3.4% last week. The Israeli-Iranian ceasefire was credited with the surge to the upside. The index had lost 0.7% over the prior two weeks.