For over a year, it’s been telegraphed that the U.S. economy is headed for a recession. The combination of high inflation, rising interest rates, and falling earnings could only point to one thing: a recession. The Wall Street Journal’s Recession Probability Index has remained above 60% for the last three quarters, while the Conference Board’s Recession Probability Index crossed 50% in May of 2022 and hit 99% in February of this year. Meanwhile, the University of Michigan Consumer Sentiment Index fell as much last year as it did during the Great Recession and has yet to recover. Anecdotally, I cannot tell you the number of conversations I have had with friends and family (none who work in finance) who were certain the economy was already in a recession.
One of my favorite economists, Chris Thornberg of Beacon Economics, says that we are living in a general state of economic miserabilism, and it does not stop with economists. At the end of 2022, stock market strategists predicted 2023 would be a negative year, and they NEVER forecast negative stock market returns. As you can see in Chart 1, this is the first time since 2000 that Wall Street strategists predicted a negative return for the S&P 500.
CHART ONE: Source — Bloomberg
What happened in the first half of this year? The S&P 500 had the second-best start since the turn of the century, up 15%.
What happened to the recession and market decline I was promised? As Mr. Thornberg states in his most recent economic outlook, “The strong real income numbers are driven by strong earnings, which in turn, are being driven by exceedingly tight labor markets. The nation’s unemployment rate remains well below 4%. The U.S. job openings rate, while down, is still higher than pre-pandemic (see Chart 2). Supply is struggling to keep up with demand, not the other way around.”
CHART TWO: Source — YCharts!
“There are plenty additional positive indicators, too. Industrial production has remained at near all-time highs in recent months, and retail inventories are still mostly on the low side. And for all the fear expressed in the confidence figures, the stock market has been rising steadily since last October. Even the housing market has started to bounce back with home prices rising in the last two months—and this is happening as new home sales have picked up. Home inventories remain tight, and credit markets remain record clean. Housing starts have stabilized at 1.4 million units per year — above what they were in 2018. In fact, outside of pessimistic headlines it is hard to find anything terribly wrong with the current U.S. economy.”
A troubling concern I see is the Federal Reserve’s (Fed) stubborn views on inflation. The Fed has a dual mandate (low unemployment and low/steady inflation). The low unemployment side of the equation is currently well in hand, so the Fed is focusing on inflation. The problem is, when the Fed raises interest rates, it typically takes 12-18 months before the effects of rate hikes make their way into the economy. The Fed started hiking rates in March 2022 which means we are just beginning to feel the effects of the rate hikes made through May of 2023. I worry the Fed will continue to increase rates if, for no other reason than, “Why not?” Inflation is coming down naturally and in reaction to the Fed’s 2022 rapid interest rate increases. Continued small rate increases by the Fed could be the cause of a most unnecessary, albeit mild, recession.
Despite this, we feel the current miserabilism that grips the headlines is unwarranted. The US consumer is on strong financial footing. When there are more job openings than people to fill those jobs, it means that wages should continue to move higher, and consumers will have more money in their pockets to spend. Additionally, with a healthy consumer comes healthy corporate earnings (see Chart 3) which fuel stock market gains.
CHART THREE: Source — Carson Wealth
We do know there will be a recession … at some point. However, we do not see one anytime soon. There is too much evidence pointing to consumers being in one of the healthiest financial positions we have seen in some time, and that should stave off a recession for the near future. We continue to diligently look at portfolios and adjust as markets change, and we believe the rest of 2023 will be lucrative for clients.
As always if you have any questions or if your financial situation has changed (beneficiaries, income needs, investment objectives, time horizon, risk tolerance, etc.) please contact our office, and stay safe.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and there is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing involves risk including loss of principal.
No strategy assures success or protects against loss. The economic forecasts set forth in this newsletter may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
