The Changing Seasons
By James M. Walden, CFA
The progress on lower inflation continued in June. Annual inflation fell to 3%, and the consumer price index actually dropped a bit in June from May. Excluding food and energy, core CPI was up 3.3% from a year ago, which is also continuing improvement. With real-time indicators of shelter costs and average hourly earnings continuing to moderate, it’s likely that overall inflation numbers will keep trending down, too.
We’ll see soon whether this was enough of the “more good data” the Federal Reserve wants to see before its first interest-rate cut since tightening began in March 2022. We doubt the Fed will announce a cut at its meeting in a few weeks. The Fed generally doesn’t like to surprise markets, and it hasn’t done enough messaging to prepare the markets for a July cut. But it’s possible, if not probable, that the Fed will use the July meeting to begin that groundwork. In fact, as of this writing, the CME FedWatch Tool is suggesting a 94% chance of a Fed cut in September, the first meeting after July’s.
To be sure, lower inflation and the prospect of interest-rate cuts are good. But the timing here aligns with the start of what has historically been the most volatile stretch of the year for financial markets. The Cboe Volatility Index (VIX) is designed to measure the volatility of the S&P 500. When the stock market is calm, the VIX is low. Conversely, when market volatility is high, so is the VIX. Hence, the VIX is often used to gauge the amount of fear or stress in the market. As the exhibit shows, the VIX historically starts to rise here in the summer through late fall.
Exhibit: VIX Seasonality
Source: Topdown Charts, LSEG, Clayton Wealth Partners.
We take seasonality measures with a grain of salt. While they suggest a tendency of what has occurred throughout the calendar over time, what really matters is what’s going on in that day’s current economic and financial environment. Still, such strong historical trends, coupled with historically elevated volatility leading up to presidential elections, are worth being aware of.
Bullish
- The Fed has made good progress in reducing inflation since 2022.
- The Fed appears poised to start cutting interest rates in 2024.
- The most attractive yields for fixed income and cash in years.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth with recession pressures mounting.
- Banks are tightening lending standards.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Israel-Hamas conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.