Global economy: Every crisis brings something new

Ivan Kompan

We are in for a short week on the occasion of Memorial Day that is celebrated in the United States today, May 30th. But short does not mean calm, and it is very interesting whether the indices will be able to continue the growth that began last week after seven weeks of continuous decline. By the way, there have only been three losing streaks of this length in history — in 1970, 1980, and 2001 — and in the first two cases, the S&P 500 rose more than 30% over the next twelve months. In 2001, things turned out quite differently — during the next half of the year, the S&P 500 lost another 14%. How will it be this time?

Should we expect that the decline has already ended and we have reached the bottom? Most investors are inclined to believe that the growth of recent days is a classic "bear market trap" — a short-term growth, after which there will be a decline again and so on until complete capitulation. Everything is possible because short-term "rebounds" are an integral part of any bear market, as evidenced by statistics. In 2000, there were 6 such "rebounds", in 2008 — 5, in 1932 and 1934 — 4 each, in 1980 — 3, in 1970 — 2. This time we are witnessing only the first one. Will it be the only one, as in the crisis of 1948, we will see …

On Tuesday, May 31, the value of the Consumer confidence index will be made public, which is a good indicator of what is happening in the U.S. economy. As one Commonwealth Financial Network executive famously put it, "How the consumer feels is how the economy feels, and ultimately — the market."

This week we will have a lot of information about the state of the labor market in the U.S. The main event will be the Market Report by the U.S. Department of Labor for May, which will be released on Friday, June 3. A certain decrease in the number of people who started working is expected — from 428,000 in April to 325,000 in May. With inflation pushing companies to cut costs, many have announced a halt to hiring new employees and layoffs.

Inflation remains the main topic of conversation in the corporate world. According to FactSet, the term "inflation" was used at least once by 398 S&P 500 companies during the announcement of Q1 results. Another 338 also used the phrase "production chains". Overall, S&P 500 earnings increased by 9%, the lowest since Q4 of 2020. But the worst thing is that in Q2 there might be lot of negative surprises from companies whose profitability is suffering from inflation, and this is unlikely to add optimism to the market.

On Wednesday, June 1, the Fed's previously announced balance sheet reduction, the so-called QT (Quantitative Tightening), as one of the measures to overcome inflation, begins. Surely no immediate effect should be expected, but in general, QT and the start of a rate hike cycle is one of the key differences between the current situation and previous crises. Same old — every crisis brings something new that is impossible to prepare for...