Malaise Malaise\images\insights\article\businessman-stress-small.jpg July 8 2022 July 8 2022


Markets might be setting up for '70s' era modest returns.

Published July 8 2022

(Muh lays) Noun A general feeling of discomfort, illness or uneasiness whose exact cause is difficult to identify. The 1970s featured high inflation, an energy crisis, high government spending, high unemployment and a declining dollar. (Except for unemployment and a weak dollar, it describes our economy today.) Few economists could explain the simultaneous rise of inflation and unemployment, which in 1972 a Washington Post columnist labeled “stagflation.” On July 15, 1979, President Carter addressed the nation about the “crisis of confidence.” Critics called it the “malaise” speech. It feels like the ’70s redux. The worst first six months for stocks in half a century. The worst year for bonds since 1933. The highest inflation in 40 years. All this is crushing animal spirits, despite continuing job and income gains (more below). In dollar terms, U.S. equities have shed $14 trillion so far this year, exceeding 2008’s $11 trillion decline. Along with fixed income and crypto losses, the cumulative wealth destruction is huge (to say the least). Consumer spirits are getting crushed, too, with high-income consumers even less confident than low-income consumers. That’s happened only twice before, both in severe recessions. If the more affluent start pulling back, real consumer spending (70% of the economy) could fall. While on track to eke out a gain in Q2, spending declined in May and, Bank of America credit and debit card data suggest, decelerated in June, with leisure spending—restaurants, bars, vacation travel and lodging—shrinking. Among small businesses, the outlook has plunged to a record low, the NFIB says.

Despite the gloom, 2022 global earnings growth expectations have risen 4.5 percentage points since the start of the year, to 11.3%, and bottom-up earnings estimates in the U.S. have hardly budged. Hard to make sense of that, Bank of America says. Its macro indicators suggest 0% earnings growth over the next 12 months. Earnings reports over the next few weeks should shed some light. There are signs inflation is moving off the boil. Energy and other commodity prices have pulled back—bellwether copper hit a 20-month low this week—and Google searches of “inflation” have dropped sharply. The implied inflation rate five years out (based on 5-year Treasury and 5-year TIPS yields) has plunged 100 basis points from its late March peak, dropping below 2.5% on Thursday, not far from the Fed’s target. In the past two weeks, the anticipated Fed cycle peak has been pulled forward from spring to early 2023, with the top target funds range reaching 3.4%. That would leave it below the anticipated inflation rate for the first time since 1970. So long, Fed put. Inflation still has some “sticky’’ hurdles to clear in rising owners-equivalent rent, a still tight labor market, and global food and energy prices that remain historically high amid supply constraints and war (more below). But if it has peaked and starts slipping, bulls are betting the Fed will back off, making a “soft landing” more likely. A “buy the dips” market after an historically bad first half. Wolfe Research, like Bank of America, still thinks earnings will have to reset. But it expects equity markets to rip higher if and when Chair Powell et al signal tightening will start to wind down.

It seems more likely the Fed will act like it did in the mid-’70s, tightening enough to spark a recession but not enough to crush inflation. The worst of both worlds. Inflation “peaked” three times that decade, pulling off highs for a while and spawning market runs, only to resume climbing to even higher highs in each case, taking stocks down with it. The Fed clearly is in a quandary, as illustrated by bond market volatility—the MOVE index this week topped 150 for only the 11th time in 50 years. Yields keep bouncing up and down on the tug of war between selling off on inflation fears and rallying on recession worries (the Bloomberg story count for the word “recession” has exploded, almost hitting 2020 levels when the pandemic hit). Monetary policies typically take a year to have an impact (it’s just five months into this cycle), leaving some to wonder if the Fed is playing with fire. When policymakers inverted the curve with rate hikes in 2007, the global financial crisis followed. The curve is inverting again, and with quantitative tightening unfolding, M2—the broad measure of money supply—is at risk of contracting significantly for the first time since the 1930s. But if the Fed makes another U-turn (it was just last November when it abandoned “transitory”), might structurally higher inflation remain in place? Even with recent slowing, headline and core inflation look to remain above Fed targets this year and next. Lockdowns, $5.3 trillion of fiscal stimulus (!!!!!), $1.8 trillion of liquidity injections into the banking system and Fed bond purchases of a third of Treasury and agency mortgage-backed securities can’t be quickly reversed. So, an inflation-driven recession, contracting real growth, negative real income growth, increasing nominal growth, a small decline in earnings and … malaise. Malaise would mean a wide trading range and more modest returns in the market for years to come. ’70s redux. I had a great time in the ’70s! Inflation was a “bummer,” but life was good. Have I mentioned I was a disco queen back in the day?


  • A 75 basis-point hike in July appears to be baked in stone June nonfarm jobs posted another big beat, with gains across industries. While Q1 posted a negative real GDP print and the Atlanta Fed’s GDPNow real-time tracker suggests the Q2 could follow, making for a “technical” recession of two consecutive negative quarters, the National Bureau of Economic Research uses employment as a key indicator and it continues to flash strong growth.
  • Peak inflation? Year-over-year average hourly earnings moderated a third straight month in June, and the rolling 20-day move in Deutsche Bank’s commodity survey marked its third-largest decline in 90 years, behind only the global financial crisis and the initial Covid shock and on par with the early days of WWII in 1940.
  • Capex continues to climb New orders for manufactured goods jumped 1.6% in May and were revised up for April. Notably, orders-ex transportation, a capex indicator, rose 1.7% and also were revised higher for April.


  • Services soften Both ISM and Markit nonmanufacturing gauges slipped but remained solid, with the business activity subcomponent of the ISM survey coming in above consensus while price pressures eased. Still, respondents said the outlook remains challenging amid “logistical challenges, a restricted labor pool, material shortages, inflation, the pandemic and war in Ukraine.”
  • The war is hitting Germany hard The European Union stalwart printed its first trade deficit since the reunification boom of 1991. Soaring energy prices due to the war are a big reason and there are fears it may get worse. European natural gas prices have shot up 131% over the past month on worries that Russia may not reopen the Nord Stream 1 pipeline later this month.
  • Food is expensive everywhere Global food inflation picked up to a 15% annual rate in the three months through May—a multi-decade high—and its breadth across countries and regions is wide. Emerging market food CPI is up 18% annualized. In China, it’s up almost 18%. And in developed markets, it’s up 14%.

What else

The miracles of modern medicine With human life expectancy increasing more in the past 50 years than in the previous 200,000 years, two-thirds of all people in history who have lived to 65 are alive today.

Uh, thanks for the help In an effort to do be seen as doing something about inflation and supply chains, the Biden administration reportedly is weighing cutting Trump-imposed tariffs on China … on about $10 billion of goods, out of $370 billion overall.

Why aren’t we hearing more about this? Bank of America shares that only 2% of solar energy from the Sahara is needed to power the whole world.

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Tags Equity . Inflation . Monetary Policy . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Stocks are subject to risks and fluctuate in value.

The Global PMI is compiled by Markit Economics and is derived from surveys covering more than 11,000 purchasing executives in 26 countries.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Markit Services PMI is a gauge of service-sector activity in a country.

The Merrill Lynch Option Volatility Estimate (MOVE) is a yield curve-weighted index of the normalized implied volatility on 1-month Treasury options.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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