Schwab Market Perspective: Rolling Recovery?

As U.S. economic growth continues to surprise to the upside, investors have repeatedly reconsidered expectations about when and how quickly the Federal Reserve will begin to cut interest rates. This has led to some volatility in the Treasury market, which may continue until there is greater clarity about inflation and the timing of potential Fed policy changes. Meanwhile, we explain why oil prices are unlikely to sustainably appreciate further despite current geopolitical risks.

U.S. stocks and economy: Rolling recoveries unfolding?

There are early signs that some previous "rolling recessions" across various sectors or geographies in the United States are starting to turn into rolling recoveries. One of the sectors that first entered its own slowdown (in late 2022 and into early 2023) was the manufacturing sector. As reflected in the Purchasing Managers' Index (PMI) from the Institute for Supply Management (ISM), you can see in the chart below that the manufacturing sector fell into contraction (a level below 50) in November 2022. It remained in that state until this past March, and now, the PMI is at its highest since September 2022.

As the manufacturing PMI has carved out a bottom and now started to turn higher, the services PMI has continued to soften. The good news is that the index is still in expansion territory; the bad news is that the path of least resistance still may be lower. We continue to think the best-case scenario for the broader economy is for the continued roll-through of slower activity. The key for the rest of this year is whether the coming strength in manufacturing can offset any coming weakness in services—essentially, the inverse of what we've seen over the past year.

Manufacturing and services offsets

Manufacturing and services offsets

Source: Charles Schwab, Bloomberg, as of 3/31/2024.