This week the Market fell slightly due to the hottest inflation report since 1981, breaking April's record this year. As the Federal Reserve weighs faster rate hikes, Wall Street is recalibrating its growth forecasts while corporate earnings start reporting.
The S&P 500 fell by -0.93%
The Dow edged lower by -0.16%
The NASDAQ lost -1.57%
The Russell 2000 dropped by -1.41%
This past week saw inflation rise at its fastest rate in over 40 years. According to the Consumer Price Index, prices rose 9.1% for urban consumers in June. In response, many Federal Reserve governors are weighing a 1% increase to the baseline interest rate at the end of June.
However, on Friday, some members cautioned against too big of a hike, which could push the US economy into a recession. Banks, which began reporting their Q2 earnings this past week, have signaled that consumption has started to decline.
Despite worries over a recession (i.e., negative economic growth), the International Monetary Fund still projects that the US will grow by 2.3% this year. While this projection is down from an estimate in late June of 2.9%, positive growth for the year would technically keep the US from falling into a recession.
But this forecast could keep coming down quickly as the effects of Russia's War on Ukraine have ignited rising prices globally and slowed consumer demand. In Europe, the European Commission cut its GDP forecast for the Eurozone from 2.3% to 1.4% due to a strong dollar causing import prices to rise.
As institutions adjust their forecasts, the global economy is at high risk of falling into a recession, which could lead to a systemic shock across all Markets. And in comparison to the last worldwide recession during the Global Financial Crisis in 2008-10, we're missing China's growth engine, which helped pull the world out of the previous downturn.
Revisting China in 2008
In 2008, when the US and developed nations fell into the deepest recession since the Great Depression, China was an emerging economy with GDP growth rates of over 8% per year. While China didn't emerge unscathed from the financial crisis that beleaguered developed markets, it had far less exposure to US banks and toxic debt than the EU.
To shore up its economy as global consumption fell, the Chinese government announced a $586 billion debt stimulus to shore up its private industry. And it largely worked as China's GDP recovered from 6% in Q4 2008 to over 8% in Q1 2009.
Thanks to the influx of cash, China's economy never fell into recession, reaching over 10% growth by the end of 2009. By growing into the globe's second-largest economy (surpassing Japan) in 2010, it also became one of the world's few growth areas, benefiting its trade partners.
The stimulus also ended up being oversized as China's consumer economy grew and provided domestic demand for its economy. As much as 20% of the loans were "written off" and likely made their way into personal bank accounts, causing a new cash-heavy consumer class.
Wealthy Chinese used these funds to purchase properties offshore, from Australia to London to Los Angeles, which helped stabilize real estate markets in free fall. The emergence of Chinese buyers created a growth engine for the rest of the world that helped pull many of its trade partners out of recession.
…but don't expect a repeat performance
However, as the global economy stands on the precipice of a worldwide recession once again, international ties and cooperation has changed dramatically. The China and the US are far more adversarial now than in 2009, and there are pushes on both sides to decouple trade in strategic areas of interest, such as technology and commodities.
This time around, China's economy is far more mature and struggling to grow with its government's zero-COVID policy. As cities underwent lockdown following case surges in March, China's domestic demand and production became strained. In Q2 2022, China grew at just 0.4% from the year before, far below 4.8% growth in Q1 2022 and at its slowest pace since the start of the Pandemic.
Additionally, as the Chinese government has committed to preserving ties with Moscow following Russia's invasion of Ukraine, President Xi Jinpng’s support of Putin has strained its relationships with much of the Western World. Vebal threats of economic sanctions against China has increased tensions.
However, international cooperation and trade will be necessary for the international and the US economy to stave off a recession and recover quickly from one if it comes to pass. But given that global powers are far less united now than in 2009, it could be a difficult tightrope to tread.
Below are this week's gainers and losers
Weekly Gainers and Losers: July 11th-15th
US Natural Gas Fund (UNG): +17.84%
After dropping over the past few months over recession fears, natural gas surged this past week on news that Europe will consider rationing the commodity. The Nord Stream 1 pipeline between Russia and Germany was shut down for 10 days of maintenance, but there is fear that Moscow will opt to not turn it back on, causing a gas crisis.
Breakwave Dry Bulk Shipping ETF (BDRY): +4.58%
Shipping has dropped mightily from its Pandemic highs just a year ago. Although shipping should slow with a global downturn, it is still a supply chain bottleneck globally, and prices are still elevated compared to before the Pandemic.
20+ Year Treas Bond Ishares ETF (TLT): +3.24%
Despite interest rate climbing this week (bad for bonds), long-term treasuries gained on the increasing probability of a US recession. As the probability of a global slowdown increases, investors are shifting to safer assets, such as bonds.
Simplify Interest Rate Hedge ETF (PFIX): -10.70%
On the opposite side of the bond trade, ETFs, such as PFIX, bet against the price of US Treasuries, believing them to decrease as interest rates rise. As more demand enters the Market, treasury prices are increasing, sending hedged ETFs like PFIX down.
Solar Invesco ETF (TAN): -9.09%
Clean energy companies fell this week as Democrat Senator Joe Manchin announced that he would not support the Whitehouse's policy efforts to pass bills on climate change. Cleantech stocks that rose after President Biden's election have given up nearly half of the value they gained in 2020 due to stalled policies.
Golden Dragon China Invesco ETF (PGJ): -8.65%
This week, China announced that it only grew by 0.5% in the year's second quarter. A zero-COVID policy has hindered the country's consumer demand and production, sapping its economic growth.