Slowflation Slowflation\images\insights\article\snail-mossy-grass-small.jpg July 5 2023 April 21 2023


Slower growth and stubborn inflation argue for patience and selectivity.

Published April 21 2023

The largest number of new apartments built in 40 years. The biggest drop in home prices in 13 years. Tesla price cuts. Whenever there’s a shortage of anything, capitalism will fix it. Rents have now fallen for six months in every major metro market. In autos, “Price wars are breaking out everywhere,” Ford CEO Jim Farley says. All of this is disinflationary. But central bank progress toward inflation targets remains grueling. Fed and ECB policymakers vow they are not done even as impacts from their past year’s record hikes spread. It’s not just at banks (more below). A broad swath of activity is blah (more below). A hot labor market is cooling—several regional Fed districts reported slowing employment growth, and in a proprietary Evercore ISI quarterly survey, the share of companies expecting wages to slow vs. accelerate in the year ahead was the highest since 2014. Our own forecasts for real GDP growth this year and next is 1.1%, with core PCE moderating but still well above the Fed’s 2% target. With a still tight labor market, this looks like slowflation, as UBS calls it, not stagflation. The Swiss bank looked back 50 years and found Energy, Utilities and Consumer Staples performed best in such periods of weak growth and persistent inflation. The Fed will surely pause before long. In seven of the past 10 times it did, defensive stocks outperformed cyclicals, regardless of whether they were “growth” or “value.”

Many stones in this market’s Wall of Worry. Volume and volatility have contracted sharply. A lot of rotation under the surface—with the S&P 500 trading near its highs for the year, April’s best sectors (Financials, Health Care and Energy) were the worst in Q1. Earnings to date show big banks that make a lot of loans are fine. Those that are deposit heavy with fewer traditional lending outlets not so much. This is the only time since 1932 that Strategas Research says bank stocks as a group have been down six months after a market low (last October). CNN’s Fear and Greed Index and the Investors Intelligence bulls-bears gauge are nearing levels corresponding with equity peaks over the past year. Favorable April seasonality is giving way to a pre-election May, which going back 90 years, tends to be negative. On a macro level, an inverted yield curve, tightening lending conditions and a contracting money supply are flashing red. Since 1960, the market always has troughed after a recession started. If the bond market is right about inflation, more margin compression lies ahead. And don’t forget the debt ceiling (more below).

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But is this the year to sell in May and go away? Historically that tends to work because most companies end their year in December and have their largest EPS upgrades by April, when analysts tend to be their most bullish. Not a lot of that going around this year. And the summer of year three in the 4-year presidential cycle typically experiences a rally, followed by a dip in the fall. Hard to get a solid read amid all the countervailing narratives. Yes, credit card debt is at a record high but as a percentage of disposable income, it’s only 6.2%, below the 6.6% average from 2012-2019 and the 8-9% average since the 1990s. Yes, M2 is contracting and bank credit is tightening, but the money supply is still some $3 trillion above its pre-pandemic level, and corporations have far more options for money beyond banks than they did a generation ago. Yardeni Group thinks sentiment may not be bullish enough to work as a contrary indicator for the bears, nor bearish enough to work for the bulls, leaving a stalemate in their tug-of-war until the recession and debt-ceiling debates are resolved. While the market has used Big Tech as a haven during this uncertainty, it’s a crowded trade and, with tech earnings coming up, could be due for some pain. In a Bloomberg TV appearance this week, I was asked “What are you telling clients to do?” If you’re bullish, be patient. If you’re bearish, be patient. And while we meander within a nearly 7-month range, trim near the highs, add near the lows and incomes are cheap!


  • Housing is reviving … Existing home sales gave back some of February’s outsized gain in March but inventories tightened further, in line with the fourth consecutive monthly improvement in builder confidence, where the future sales component rose to its highest since June 2022. Single-family starts also surprised, and as noted above, new apartment construction is surging. Bloomberg’s surprise index for housing has rarely been higher.
  • … it really is A rolling recession that may be headed into the commercial real estate sector is rolling out of single-family housing and apartments. Yardeni also sees plenty of construction of nonresidential structures going on, with home improvements in February near a record high $361 billion—as big as construction spending on single-family homes! The construction industry’s payroll employment headcount hit a record high last month.
  • Good blah Even though the headline contracted an eighth straight month, underlying components in the Philly Fed manufacturing survey suggested a trough as shipments, new orders, employment and the 6-month outlook improved. New York’s Empire was an even bigger surprise, bouncing into expansion territory for the first time in five months on surging new orders and shipments. This morning’s initial S&P Global (nee Markit) PMI for April also posted the first expansion in factory activity in six months. An increase in the services PMI beat consensus, too.


  • Bad blah The Fed’s Beige Book suggested the early year bump in economic activity is fading, with lending activity and loan demand declining among businesses and consumers, the number of districts reporting modest growth at three, half February’s six, and manufacturing activity, transportation and freight volumes flat to down. One plus: travel and tourism industries continued to report rising demand across the dozen regional Fed districts.
  • June’s right around the corner A technocratic FOMC staff memo from 2013 that was made public in 2019 assesses the possible macroeconomic effects of a federal debt default. It concluded that even if temporary, a default could cause government yields to “rise noticeably,” private rates to “rise sharply” and equity prices to fall “appreciably.” With both sides gearing for a fight to the finish, Bank of America sees the risks as worse today than then. House Speaker McCarthy’s proposal went nowhere in the White House this week, and lagging tax receipts suggest the X-date could hit as early as June.
  • What happens in China stays in China The country’s stronger-than-expected 4.5% growth in Q1 GDP was primarily a domestic consumption story, with almost no spillover into the global economy. While further acceleration in Q2 and a recovery in its international travel could lift other countries somewhat, the effects are expected to be modest and concentrated in Asia.

What else

A volatile trip to nowhere The 2-year rolling total return of the S&P is now close to zero and in price terms only, is down slightly. An optimist might say this is impressive given all that was thrown the market’s way the last two years (inflation, record tightening, war). A pessimist may note with CPI 13% higher than it was in April 2021, this is a substantial negative real return, especially when long-term studies put annualized real returns in U.S. equities the last 100 years at 7.2%.

MOVE over VIX The volatility gauge for the bond market surged to a cycle high last month and arguably has become a better risk barometer than the VIX, which reached a rather ho-hum 26 at the height of the banking panic. Leuthold believes the VIX is a victim of two factors: 1) S&P mega-cap heavyweights (aka Big Tech) have performed really well as a high-quality haven, propping up the index and capping a move in the VIX in March and 2) Panic activity was concentrated in short-term financial market activities, such as options and liquidity instruments, better captured by the MOVE.

Tomorrow is Earth Day To mark the largest secular observance in the world celebrated by over 1 billion people, Bank of America shares that the world is now using nature’s resources 1.7x faster than our planet’s biocapacity and will reach 2x by 2030. One reason: for every baby, there are four devices being connected online.

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Tags Equity . 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.

Bloomberg Economics US Housing and Real Estate Surprise Index: A measure of the degree to which the housing data is coming in better or worse than expectations. Indexes are unmanaged and investments can not be made in an index. 

CNN's Fear and Greed Index measures several indicators of investment sentiment.

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

Formerly known as Markit, the S&P Global Manufacturing Purchasing Managers Index (PMI) is a gauge of manufacturing activity in a country.

Formerly known as Markit, the S&P Global Services Purchasing Managers Index (PMI) is a gauge of services activity in a country.

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

M2 is a broad measure of money supply that includes not only cash and checking deposits but also easily convertible "near money" such as savings deposits, certificates of deposit and money market securities.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Empire State Non-manufacturing Index gauges the level of activity and expectations for the future among non-manufacturers in New York.


The Federal Reserve Bank of Philadelphia gauges the level of activity and expectations for the future among manufacturers in the Greater Philadelphia region every month.

The Investors Intelligence bull–bear ratio is a measure of market sentiment derived from a weekly survey of individual investors who are asked to rank themselves as bullish or bearish.

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 Association of Home Builders/Wells Fargo Housing Market Index is a gauge of how well or poorly builders believe their business will do in coming months.

VIX: The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility.

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.

Federated Equity Management Company of Pennsylvania