"RECESSION IS NOT OUR BASE CASE" | CROUCH CONNECTION, July 2022 "ADV" by Dave Crouch
“RECESSION IS NOT OUR BASE CASE”
New York Federal reserve President John Williams said last week on CNBC that he expects the U.S. economy to avoid recession even as he sees the need for significantly higher interest rates to control inflation.
“I think the economy is strong. Clearly financial conditions have tightened and I’m expecting growth to slow this year quite a bit relative to what we had last year.”
He says he could see gross domestic product gains reduced to about 1% to 1.5% for 2022…
“But that’s not a recession. It’s a slowdown that we need to see in the economy to really reduce inflationary pressures that we have and bring inflation down.”
San Francisco Fed President Mary Daly repeated that forecast, saying she’s expecting U.S economic growth to slow, but doesn’t see it tipping into recession.
WHY IS THIS DISCUSSION IMPORTANT?
This is an important question because it is rare for the stock market to exceed a 20% drop unless there is indeed a recession going on or in the immediate future. According to David Rice writing on Seeking Alpha in 2018:
“The six market corrections occurring with recession since the 1973-75 recession had an average duration of 13 months and saw an average decline of 33.5%. In comparison, the six corrections occurring without a recession had an average duration of 4.7 months and average declines of 17.3%.”
In 2022 we have already seen a top-to-bottom decline of 24.5% on June 17th, suggesting that if we avoid a recession, we may have seen the market low for the year. Many times the markets top out before the start of a recession and bottom out before their conclusion. Sam Stovall, a respected market strategist who spent 27 years at Standard & Poors, recently explained:
“Prices lead fundamentals---therefore the stock market falling into a decline is traditionally an indication that most investors believe we are headed for a recession. When we do finally fall into a recession, that’s usually a good time to get back into the market.”
Despite the gloomy outlooks that are being widely shared in the media, economists still widely expect economic growth to remain solid with a rebound in the second half. More than likely, there will be much debate in the media about the definition of a recession, but employment growth is still too strong for an official recession call.
BUT WHAT ABOUT INFLATION?
As Raymond James’ Chief Economist recently pointed out, this is really all about inflation:
“There is no denying that inflation has become the most pressing subject for Americans…(but) the stock market is not the economy…markets are more forward looking than economists’ data points.
We remain in the camp that the Federal Reserve (Fed) will be able to engineer a soft landing and will spare the economy from a recession…we still believe that the slowdown in the housing market is ongoing and will be reflected in the numbers going forward.”
BOND MARKET SAYS WORST MAY BE OVER
Tavis McCourt, RJ Managing Director of Equity Research, recently said that the bond market has ceased worrying about inflation:
“Clearly, weakening global growth and fear of U.S. growth has pushed investors back into the ultimate safe haven trade. The 10-year inflation breakeven (expectations) have decreased from 3.04% to 2.56% (currently 2.34%). The media and the politicians may be hyperventilating about inflation, but the ultimate arbiter of inflation risk, the bond market, is suggesting the inflation outlook is improving, likely with the help of Chairman Powell’s uber-hawkishness.”
Evercore ISI’s Ed Hyman agreed this week that inflation fears have moderated, noting that:
“Over the last three months, the five-year breakeven inflation expectations have declined more that 100 bps (1%). Meanwhile copper has declined to 358 from 480 (over 25%).”
COMMODITY COLLAPSE POSITIVE
As Hyman pointed out, copper has fallen over 25% from its high, signaling a weakening economy. Copper is widely followed as a predictor of economic growth because of it’s widespread use in construction and automotive manufacturing. With electric vehicles recent popularity, it has become even more important.
Other industrial metals have also come down from their highs, including zinc, nickel, iron and steel. Lumber has dropped from $1,733 per board foot to $657, a 62% decrease. Fertilizer (down 10%), corn (down 25%), soybeans (down 24%) and even wheat (down 35%) are promising relief from the rising food prices.
Even oil has fallen from the February high of 130 closing Friday (July 1st) at 110, a drop of 15%. Granted we are not seeing it at the gas pump yet, but we should see it soon.
As for the supply chain issues plaguing American businesses, our friends at Federated report that:
“The West Coast port backlog has improved, from a record 106 ships stuck at sea at the beginning of the year to less than 20 ships at midyear. “
INSTANT GRATIFICATION ON PAUSE
We live in a world of instant gratification, the world of the quick fix. Amazon and Google have conditioned us to expect everything to have a quick fix, a quick solution, but investing is not for those who need instant gratification. Patience has usually rewarded those willing to ride out these turbulent times, and we are optimistic that will be the case again.
Warren Buffett snapped up $51 billion in stocks in the first quarter – an amount more than any other three-month period in Berkshire Hathaway’s history. We are getting a few calls to buy into this market. Let us know if you would like to follow his lead.
Please let us know if you need anything. Kim, Kay and I are here to assist in any possible way, so call us any time. We look forward to your calls!
Dave Crouch Kim Blackburn Kay O’Connell
Registered Principal Branch Operations Manager Financial Advisor
"The most common cause of low prices is pessimism -We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.”
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.