By Steve Goldstein
Will the FOMC put an end to the FOMO in markets? More on that in a second.
But first we’ll discuss this bearish call from Invesco, the fund manager with $1.4 trillion in assets under management.
For the first time since Feb. 2020, Invesco’s macro framework has entered what it calls a contraction regime, which means both that the economy is growing below its long-term trend and is expected to decelerate. Its definition includes, but doesn’t require, recession.
Invesco’s global leading economic indicator has dropped below its long-term trend for the first time since the second quarter of 2020, when the world was first confronting the coronavirus pandemic, as both the U.S. and the developed ex-U.S. leading indexes have dropped for three straight months. They were dragged down by business surveys, housing indicators, industrial orders, consumer sentiment and labor market conditions in manufacturing — so basically everything, except maybe meme stocks.
Contraction regimes, Invesco says, last an average of 7 months but have run up to 15 months. During those periods, the average annual performance of U.S. stocks vs. the 10-year Treasury is -12%, with global equities performing an even worse -16%. Defensive factors outperform the broader by an average of 4%, Invesco says.
Markets, the firm adds, have largely not priced in a recession. The underperformance of stocks this year is almost entirely in line with the underperformance in 30-year government bonds /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.96% .
“Broadly speaking, equity and credit markets have not discounted the additional underperformance due to lower earnings growth to be expected in a recessionary scenario,” said Alessio de Longis, senior portfolio manager and head of tactical asset allocation for Invesco Investment Solutions.
The firm sees parallels with the hot inflation of the 1970s and 1980s, although unlike those periods, inflation expectations are less severe and core inflation is not as high. “Our gauge of U.S. inflation momentum provides some early indication of peaking inflationary pressures over the past 3 months, but it is too early to judge the persistence of this negative momentum,” he added.
Its asset allocation recommendations reflect the increased caution — more toward bonds than stocks, toward U.S. than developed rivals and toward defensives from cyclicals.
U.S. stock futures /zigman2/quotes/209948968/delayed ES00 -0.94% /zigman2/quotes/210219788/delayed NQ00 -0.68% were weaker after the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.03% finished at highest level on Tuesday since April 22. The yield on the 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.59% rose to 2.88%, and the real action was in the U.K., where gilt yields surged after an inflation surprise .
The minutes of the last Federal Open Market Committee meeting are due at 2 p.m. Eastern. There’s already a gap between what Fed policymakers say they will be doing and what the market believes, so the question is whether the minutes widen this sizeable expectations gap or not.
Retail sales for July were flat , though outside of gas and autos it rose a solid 0.7%. There’s also a $15 billion auction of 20-year Treasury securities.
Lowe’s /zigman2/quotes/205563664/composite LOW +0.49% , the number-two home improvement retailer, beat on earnings but missed revenue expectations. Target /zigman2/quotes/207799045/composite TGT -0.37% recorded a far worse than forecast second-quarter profit, but didn’t change its sales forecast for the year.