The bears are clawing at the U.S. stock market. Let\u2019s look at six reasons why they believe stocks are about to tumble \u2014 and why they will be wrong.<\/p>\n
1. Consumers are running out of savings, so the economy will stall<\/strong>: Many U.S. households are flush with wealth, making the prospect of a stall seem farfetched. Second-quarter household net worth rose 3.7% sequentially to a record $154.3 trillion. This suggests consumers won\u2019t reduce spending to save more once they run through excess savings.\u00a0<\/p>\n Moreover, employment remains strong, and many consumers have received healthy wage gains. \u201cYou can\u2019t take wage gains back once you give them,\u201d says B.J. Webster, the chief investment officer of Alera Group Wealth Services. \u201cThe spending power of the earlier wage increases will be very durable.\u201d<\/p>\n 2. Rising oil prices will boost inflation, forcing the Fed to hike and send the U.S. economy into a recession<\/strong>: With oil near 10-month highs, around $90 a barrel, bears are dusting off the argument that high oil prices stoke inflation. But oil is not likely to be a problem. Triggered by Russia\u2019s invasion of Ukraine, oil spiked to $100-$109 for six months in 2022, and that didn\u2019t cause a recession. Oil prices could lead to a recession only if it has a huge spike, and that only happens because of geopolitical crisis, says Ed Yardeni of Yardeni Research. While that can\u2019t be ruled out, it is also tough to forecast.\u00a0<\/p>\n Besides, OPEC+ members know a recession would sharply reduce oil prices and related revenue. So, they would increase supply if oil rose to recession-inducing levels.\u00a0<\/p>\n 3. Persistent inflation will keep the Fed in rate hiking mode, which will create a recession<\/strong>: Three problems with this argument: First, inflation is coming down a lot. Excluding rent, the August headline consumer price index (CPI) and core CPI were 1.9% and 2.2%, respectively, right at the Fed 2% target. Rent matters, but Zillow and CoreLogic both say increases were 2%-4% in August, compared to 13%-16% peaks in the summer of 2022. \u00a0\u201cThe Fed is effectively done, with the possible exception of a tweak here in November, and I think even that\u2019s off the table,\u201d says Todd Gervasini, the chief investment officer at Wakefield Asset Management.<\/p>\n Second, there are signs that Fed tightening is working \u2014 such as declining jobs openings and rising credit-card late payments. \u201cThe Fed recognizes that monetary policy is restrictive. I think they are done, and that\u2019s a good thing for economic growth and the markets,\u201d Alera Group\u2019s Webster says. \u201cThe Fed can fine tune the economy so we don\u2019t get a recession,\u201d adds Charles Lemonides, chief investment officer of ValueWorks.\u00a0<\/p>\n Third, capital spending has increased sharply, which boosts productivity. When companies get more out of workers because they deploy better equipment and technology, the pressure to raise prices eases.<\/p>\n 4. Fed policy takes 12-18 months to kick in, which tells us a recession will start in the fourth quarter of 2023: <\/strong> During last year\u2019s stock market rout, bears told us the declines would get really bad in the first quarter of this year, since that\u2019s when a recession would begin. Their logic: Fed tightening (which started in March 2022) takes 12 months to kick in. When that didn\u2019t happen, they pushed the timeline out by two quarters. When that didn\u2019t work, they expanded their Fed-policy tightening lag time to 18 months, projecting a recession in this year\u2019s fourth quarter. So much tweaking strains credibility.<\/p>\n The lag time it is only part of the story. The impact of Fed policy is also about shock value, says Ryan Kelley, chief investment officer at Hennessy Funds. The shock level depends on how low rates were to begin with, and how fast the Fed hikes.\u00a0<\/p>\n Last year\u2019s inflation-fighting campaign had a lot of shock value, because the starting point was a low Fed funds target range of 0.25%-0.50%, and it ramped up quickly to 3.75% to 4% by early November. If a recession was going to happen, it should have started by now, Kelley says. <\/p>\n 5. Bank loan availability will decline as banks increase their lending standards, creating a recession:<\/strong> Banks are tightening standards following the March-May 2023 banking crisis, but there is no shortage of credit or sound borrowers, Kelley says. So the economic impact will be minimal. <\/p>\n An analysis of second quarter earnings calls by Goldman Sachs confirms this. Just 7% of conference calls among Russell 3000 companies mentioned credit access issues, down from 15% during the banking crisis. Most of the comments about credit access were in the real estate sector. \u201cWe could not find any examples of companies implementing layoffs due to banking stress,\u201d Goldman economist Jan Hatzius says.<\/p>\n 6. Labor shortages will create wage pressures, which will create inflation:<\/strong> The data tell us this bear warning is wearing thin. Wage growth fell to 5.3% in August, down from 5.7% in July and 6.7% in August 2022. \u201cThe moderation of wage inflation should limit upside risks to price inflation,\u201d Bank of America Global Research says.\u00a0<\/p>\n Wage inflation is cooling because the number of job openings is declining and baby boomers are returning to the labor force, Alera Group\u2019s Webster says. <\/p>\n Another factor is the decline in quit rates. Job switchers normally command sizeable pay increases, but that\u2019s fading. Pay hikes for job switchers exceed raises for people who stayed put by far less than they did a year ago, Bank of America reports. <\/p>\n Company references to labor shortages on second-quarter earnings calls fell to the lowest level of the post-pandemic recovery, at just 2%, down from 16% in the third quarter of 2021, says Hatzius of Goldman Sachs.\u00a0<\/p>\n If you think the bears are wrong, then your focus now should be on cyclical and economically sensitive stocks that are held back by recession worries.\u00a0<\/p>\n Webster at Alera Group favors banks, many of which are trading at historically low mid-single digit p\/e ratios. For instance, he likes exchange-traded fund Invesco KBW BankStocks<\/strong> to consider<\/h2>\n
\n KBWB.<\/span>
\n He also points to the industrial sector, particularly Caterpillar
\n CAT,
\n
\n and Cummins
\n CMI,
\n
\n both of which benefit from increase capital spending in the U.S.<\/p>\n