Previous Research S&P500 Shiller PE Vs Inflation: July 2023 Update
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what’s truly concerning is when tax receipts decline despite a healthy and expanding economy.
In such cases, questions arise about the government’s fiscal management and the potential negative impacts on the overall economy. If the government, with its monopolistic powers, struggles to generate revenue, it raises doubts about others’ ability to thrive in the economy. Two possible explanations may shed light on this issue.
Firstly, the government might be implementing flawed tax policies, possibly waiving taxes. Alternatively, Keynesian economic policies may be at play, wherein the government artificially stimulates GDP growth through deficit spending.
The current US scenario has caught attention as the deficit reached 6% of GDP while tax receipts continue to decline despite apparent economic growth. This discrepancy prompts us to carefully consider which explanation is more plausible. Assuming that a government would not unnecessarily cut taxes during an expanding GDP phase, it appears that deficit spending could be sustaining GDP growth, preventing it from declining in sync with tax receipts.
This situation demands close observation, as governments cannot continue running significant deficits without facing consequences. If this was an emerging market economy, such circumstances would have already resulted in calls for a rating downgrade or even an outright ratings downgrade, but given US’s position it is unlikely to happen, or can it?
Maybe a new tail risk to consider, “a potential US ratings downgrade”.
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
S&P500 Shiller PE Vs Inflation: July 2023 Update
The latest inflation data for June indicates a significant decrease in inflation across various components, which has led to a surge in market indexes. The current conditions are favorable for a market rally. On one hand, the economy is stable, with record-low unemployment rates and expanding GDP. On the other hand, inflationary pressures are easing, resulting in increased asset valuations across the board.