Another difficult month for the US economy

LLike April, May brought little cheer to equity markets with inflationary pressures and the Fed’s attempts to control them seeming to inevitably drag the US economy into a period of stagflation, perhaps -be even followed by a recession. Even the dreaded prospect of a depression comparable to that of 1929-30 is on the lips of some economists.

Stagflation is defined as a period of stagnant growth coupled with high inflation, usually triggered by a sharp rise in energy prices – as we see today. Falling unemployment as the US economy began to recover from the Covid-19 pandemic tended to counter this trend, but there is evidence that it is starting to turn around again as inflation eats away at disposable incomes. and consumer spending begins to decline. demand for goods and services. However, it is less certain that this will turn into a real recession.

Past data suggests that a recession generally does not follow a period of stagflation. But a schedule of 50 basis point interest rate hikes at successive meetings of the Federal Open Market Committee (FOMC), as the Fed appears to be predicting, could be enough to trigger a sharp drop in stock prices across the board. areas and contribute to tilting the whole of the United States. the economy in a downward spiral. Stock declines can be sharp and severe, as we saw in the middle of last month when the Dow fell about 1,500 points over a 2-day period. Even though we have seen partial rallies in stocks since then, similar similar declines cannot be ruled out in the weeks and months ahead. A drop in the Dow below 30,000. The S&P 500 below 3,750 and the Nasdaq below 10,500 over the next two months therefore cannot be ruled out.

Precious metals seem to have made some kind of recovery, but not yet significant. Gold climbed back above $1,850 early last week but struggled to hold that level, while silver and gpm remained volatile. Precious metal stocks have tended to outperform their respective metal prices, but only marginally. The major precious metals mining companies should certainly make solid profits at current metal price levels.

The wild card here seems to be dollar strength. A strong dollar tends to indicate a weaker gold price in US dollars, and the dollar has trended higher against competing currencies in recent weeks despite the apparent weakness in the US economy. This will not necessarily continue and there were signs of a developing dollar slowdown towards the end of last month.

Data released during the month suggests that first quarter US GDP has turned negative and the latest projection from the Atlanta Fed is that the second quarter GDP growth estimate has fallen to just 1.8%. Given how unexpected the first quarter drop was, it might not be surprising if the second quarter figure was flat, if not negative as well, and the latter pushed the US economy into a technical recession. We don’t necessarily expect this to happen, but investors should perhaps be prepared for this eventuality and any negative market connotations that may result.

There is also speculation that China and Russia, as the world’s top two gold producers by some estimates, may attempt to introduce a gold-backed global reserve currency to compete for gold status. dominant reserve of the dollar. If this speculation were correct and a new reserve currency of this type was accepted, the dollar could well enter a period of decline in value on a global scale, which would certainly benefit the price of gold, at least in dollar terms.

Inflationary trends look set to continue to influence equity and precious metals markets despite the Fed’s proposed tightening and raising interest rate measures. Markets are therefore likely to remain volatile, as they have been for the past two months, and will be moved up and down by data releases that are seen as positive or negative. Equities and bitcoin could therefore remain depressed overall, while gold, in particular, could catch an upside bid as markets examine underlying trends. However, uncertainty will likely continue to reign until we see a definite move in any of the key market components.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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