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No Recession Means Higher Stock Prices

Summary Powell's comments give investors confidence the Fed will be successful in bringing down the rate of inflation. Inflation expectations are moderating. A strong retail sales report indicates there is no recession on the horizon. If we do avoid recession, the stock market should recover this year. This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Learn More » Yesterday's market action could be interpreted in one of two ways. The strength in stocks across the board was either a dead cat bounce with new lows yet to come or one more step in the process of building a durable bottom for the major market averages this year. Hawkish comments from Chairman Powell gave investors temporary pause, but stronger than expected economic data won out, as stocks gained strength into the close and finished at their highs for the day. I continue to see the glass as half full. My bullish tilt assumes that we do not have a recession this year. On that basis, the decline in the S&P 500, whether it be the deep correction we have already had or a bear market, should be short and shallow. Yesterday's retail sales report supports my view that a recession is not on the horizon. Sales rose 0.9% last month, which was slightly below the estimate for a 1% gain, but sales rose 1% when excluding gasoline and autos, which exceeded the 0.7% expected. Furthermore, the March sales figure was revised upward from 0.7% to 1.4%. Both March and April gains in sales were above the monthly rates of inflation. Despite depressed sentiment and rising prices, consumers continue to spend at a clip that supports a soft landing. Comments by Chairman Powell yesterday afternoon led to a brief sell off in stocks when he affirmed that the Fed would not hesitate to tighten monetary policy until evidence was clear that the rate of inflation was coming down. But he also acknowledged that financial conditions had already tightened significantly, as can be seen in Bloomberg's U.S. Financial Conditions Index. In fact, we are already at levels where tightening peaked in 2018. Recognizing that monetary policy works with a lag, that should give the consensus comfort that the majority of financial market tightening is behind us. Powell's hawkish comments also may be giving the consensus confidence that the Fed will eventually be successful in bringing the rate down. Perhaps that is why the long-term outlook for price increases is starting to moderate. Some good news on the inflation front has gone largely overlooked in recent days, but I assure you that the Fed is watching closely. I asserted last month that we had seen the high in the reported rate of inflation at 8.5%, and the 8.3% print for April was the first step in that direction, but inflation expectations are a far more important number for Fed officials when determining how restrictive monetary policy needs to be today. It turns out that expectations have come down along with stock and bond prices over the past few weeks. The 5-year rate has fallen from a high of 3.59% to 3.03%, while the 10-year rate has fallen from 2.95% to 2.69%. While both are still well above the Fed's target of 2%, they have fallen meaningfully, which is what the Fed wants to see. The Fed's greatest fear is that an elevated rate of inflation becomes embedded, which changes consumer psychology and encourages workers to demand higher pay, resulting in a wage-price spiral. The decline in long-term inflation expectations should ease those concerns, but none of this will work in a straight line. Monthly readings are likely to oscillate, resulting in continued volatility, but I think we will see the rate of increase fall from what has been 0.6% to 0.2% as we move into fall. That should further lower inflation expectations, improve consumer and investor sentiment, and help restore real-wage growth. It will also support a rebound in stock prices from recent lows. Lots of services offer investment ideas, but few offer a comprehensive top-down investment strategy that helps you tactically shift your asset allocation between offense and defense. That is how The Portfolio Architect compliments other services that focus on the bottom-ups security analysis of REITs, CEFs, ETFs, dividend-paying stocks and other securities. This article was written by Lawrence is the publisher of The Portfolio Architect. He has more than 25 years of experience managing portfolios for individual investors. He began his career as a Financial Consultant in 1993 with Merrill Lynch and worked in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. He graduated from the University of North Carolina at Chapel Hill with a B.A. in Political Science in 1992. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Comment

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