As a financial market enthusiast, the months of June and July 2022 will be pretty interesting this year. US Government agencies will publish data and take decisions that will influence trillions of dollars of wealth and the lives of millions worldwide.
So far, financial markets like the S&P 500 and Nasdaq have seen lows of 19% and 29% from the start of 2022. Financial markets’ performance relies on the emotions of millions of market participants. Financial market indices change every second and tend to be a predecessor to the economy’s health.
Conversely, economic data gets published by government agencies and reputable statistical firms.
Economic data obtained from historical data gets collected through scientific methods. One of the advantages is that historical data can provide estimates or future scenarios using statistical methods.
Which is the most important? Financial markets’ performance or economic data?
Both financial markets’ performance and financial information are essential. A wise investor will make use of both. Any information is a tool for savvy investors.
Factual and historical events are the basis of economic data. The main advantage of using past data is that it occurred for sure, and events would have already materialised. The disadvantage is that you need to be proactive and not reactive as an investor. You don’t want to go to the party when it’s already over.
Financial markets’ performance is based on the crowd’s wisdom and filled with emotions. Sometimes the markets can be irrational too. For example, markets can react positively to bad news and negatively to positive news.
The financial markets can predict economic performance, which is an advantage. On the flip side, it can overreact to perceptions which aren’t true. These can create a disastrous situation for any investor.
The best way forward would be to balance financial markets’ performance and economic data. Financial market data can indicate what may happen and act as a tool to predict economic sentiment.
One piece of advice to remember is that financial market performance can influence economic data. Economic data may influence financial market performance. It’s a cycle.
For example, the financial markets predicted that the Federal Reserve was about to increase interest rates by 0.5% in May 2022. The markets didn’t react to the Federal Reserve’s announcement. Why? The financial markets priced in the increase weeks before the announcement. In this case, the financial markets reacted before an official announcement.
There may be instances where markets may overreact to economic data. For example, the markets predicted that the first quarter’s Gross Domestic Product (GDP) growth would be 1%. However, the US Bureau of Economic Analysis released a news release that the GDP for the first quarter declined by 1.4%. Markets will start panicking, and there will be a sell-off of stocks.
A sell of may trigger a negative sentiment in the economy. People will be hesitant to spend their money out of fear.
One business’s expenditure is another’s revenue. For example, a beverage importer may spend a significant amount of its budget on marketing. Due to fear in the economy, it may reduce its marketing spending. Consequently, an advertising agency will see a decline in its revenue. If the beverage company doesn’t advertise, it will sell less and suffer a loss of revenue too. Overall, it will lead to an economy having a lower economic output or GDP.
In this case, the financial markets’ performance triggered an economic event or a self-fulfiling prophecy.
June and July 2022
The standard definition of a recession is when an economy experiences negative economic growth in two consecutive quarters. However, other definitions substitute “quarters” with “periods”, which usually refers to months.
On the 15th of June, the Federal Reserve will decide whether to increase interest rates or leave them at the same level following the last hike in May 2022.
One of the tools to control inflation is increasing interest rates. Suppose the Federal Reserve leaves the rates unchanged. In that case, markets may interpret the move that the Central Bank managed to control inflation. If the Federal Reserve increases interest rates, markets may interpret that it doesn’t have inflation under control. It increases the likeliness that the economy will slip into a recession.
Unlike in May 2022, when there was a broad market consensus that the Federal Reserve would increase interest rates by 0.5%, the markets have mixed feelings this time.
On one side, market players are feeling optimistic. Even though there’s inflation, the number of gainfully employed in the US increased, meaning employers hire people as they believe consumers will buy their products. On the other hand, top bankers seem to agree that the US economy is heading towards a recession, and the Federal Reserve isn’t addressing inflation seriously, or at least too lightly. Overall the balance seems to be tipping in favour of the bankers.
Whenever there are mixed feelings, markets tend to get volatile. We may see some price action after the interest rate announcement.
During July, we can expect two types of information releases. All relate to June. The end of June signifies the end of the second quarter of 2022, and critical economic data for June gets published in July.
The US economy experienced a damaging decline in its GDP for the first quarter (January to March) of 2022. Suppose the second-quarter (April to June) financial results of 2022, published in July, show another decline in economic growth. In that case, this will mean the US economy is in a recession.
The performance of major financial markets like the S&P 500 and Nasdaq show that the US economy is already in a technical recession. The economic data published in July will either confirm what the markets believe or otherwise.
If the market correctly guesses official data, I’d still expect volatility and a sell-off in the markets due to the magnitude of the news. I believe that the financial markets have a slim chance of being wrong about the US economy being in a technical recession. The news is too big not to react.
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