Will Summer Be A Quiet Season For Markets?

As we head into June, it’s a good time to take stock of where we are with the markets and economy—especially the risks.

May Quiet for Markets

Last month, financial markets generally pulled back. A notable exception here was the Nasdaq. Made up largely of technology companies, the Nasdaq was up by just under 6 percent on positive earnings surprises and general enthusiasm for artificial intelligence. At the same time, other U.S. markets were flat or down slightly, declines driven by worries over the debt ceiling debate in Washington. Further, international markets (both developed and emerging) pulled back a bit, as did fixed income on higher rates. After a strong start to the year, markets were due for a calmer stretch, which makes sense as the summer season is typically quieter.

Debt Ceiling Moving into Rearview

The primary headwind in May was the debt ceiling. The good news here is that the Senate passed the debt ceiling bill. With President Biden expected to sign it into law today, the debt ceiling risk will be off the table for this year and next, removing a major political worry in the markets.

Inflation Picking Up

While the political news is improving, the major economic worry—inflation—displayed signs of getting worse. Inflation is down significantly this year, but the May data showed signs that it may be picking up again. With that news, markets reversed the prior assumption that the Fed would pause rate hikes and drove rates back up. This was another headwind and one that needs to be watched in the months ahead.

Here, it’s important to consider why inflation may be on the rise. After all, it is for good reason: the continuing strength of the economy. Last month saw job growth beat expectations, coming in very strong. Consumer and business confidence also ticked up, and spending increased strongly. While a recession remains possible, the data suggests it is still some ways away. Corporate earnings also showed surprising strength, indicating that companies continue to operate successfully. In short, the data so far continues to be better than the headlines. Even though the economy may be slowing, it is still growing.

Risks Vs. Fundamentals

While the outlook continues to be positive, of course risks remain. With the debt ceiling issue on the verge of being solved, what happens next with the Fed is the major concern. If the Fed decides to raise rates at the next meeting after all, which would be a surprise, it could rattle markets. Beyond the U.S., we still have a war in Europe, as well as the China wild card. And that’s not even considering the risks we don’t yet see. Nothing is guaranteed.

Despite those risks, the fundamentals are healthy. The economy is slowing, but it is still growing. We appear to have avoided a political disruption of the economy, which is a big positive. And while there are still real concerns around inflation, the likelihood is that we will keep making progress.

More Improvement Ahead?

Last month’s news was mixed and dominated by political worries. Overall, there was more good news than bad, and that improvement looks likely to continue. Over the next several months, for example, we will know where we are with a recession, and inflation and rates should keep getting better. In other words, we do face real risks, but we will keep moving past them. We can certainly expect more turbulence. But despite the headlines, we are in a pretty good place as we look ahead to summer.

By Brad McMillan, Contributor