A quote we mentioned in last month’s email is worth repeating:
“Usually, recessions sneak up on us. CEOs never talk about recessions,” said economist Mark Zandi at the end of 2022. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. …Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”
Last August, the highly respected Conference Board, which compiles the Leading Economic Index, believed the U.S. economy would not expand in the third quarter of 2022 and “could tip into a short but mild recession by the end of the year or early 2023.”
The Conference Board doubled down last month, forecasting that “a contraction of economic activity” will begin in Q2 and lead to a mild recession by mid-2023.
Nonetheless, the economy expanded at an annualized pace of 3.2% in Q3 2022 and added another 2.6% in Q4 before slowing to 1.3% in Q1 2023, according to the U.S. Bureau of Economic Statistics.
Since January, the economy has added 1.6 million net new jobs, according to U.S. Bureau of Labor Statistics data, including 339,000 new jobs in May.
Neither metric is consistent with the traditional definition of a recession.
Although the year is not yet over, it serves as a reminder that the brightest minds cannot accurately foretell and time future events.
Investor’s corner
What does this mean for investors? Well, the resilient labor market and the Fed’s war on inflation should all but guarantee a rate increase at the Fed’s June 14th meeting. Yet, following 10-straight rate hikes, the Fed has hinted that it will take a break in June and forgo a hike in interest rates.
Its gentler approach this year, coupled with talk of a pause this month, has supported the major index this year. We remain in a cautious stance with the continued inversion of the yield curve, decline in leading economic indicators and tightening of bank lending standards. Historically, this has been an indicator of a potential economic slowdown. The silver lining remains, the short term fixed income market (in particular, treasury bonds) is still returning greater than 5% yields while we wait.
This year, as we have mentioned a number of times, the market’s move has been very narrow and concentrated in the top 6 mega cap technology stocks. These stocks have increased $3.3 Trillion in market cap this year, about the same market cap increase of the total S&P 500 in total.
Debt ceiling drama
According to popular belief, if a frog is thrown into boiling water, it will immediately jump out. However, if placed in warm water and the temperature gradually increases, it will eventually perish.
We’ve never tested the hypothesis (nor do we plan to), but it can be used as a metaphor.
The federal deficit is continuously expanding, i.e., the temperature of the water is slowly rising, without any clear indication of when it may pose a threat to financial stability.
However, a hard cap on the total deficit via a decision not to raise the debt ceiling would have had serious consequences. Market reaction would have been swift and dramatic.
Politicians will always posture, but behind closed doors, they recognized the need to strike a deal, however imperfect such a deal might be, and the debt ceiling was raised. Crisis averted.
As an impartial advisor, it is not within our purview to opine on the particulars of the agreement. Our role involves evaluating the market through the narrow lens of an investor’s perspective. You see, the investor assesses the economic fundamentals over a period of roughly six to nine months.
If the U.S. were to default on its debt (T-bills set to mature), it would lead to unpaid bills, a credit downgrade, and severe consequences in both U.S. and global financial markets.
Such consequences would likely lead to economic instability, higher borrowing costs for the U.S. Treasury, a weaker dollar, and a loss of confidence in the U.S. government’s ability to manage its finances.
None of these outcomes would have been desirable for investors. So, history played out once again and The Congress narrowly avoided a government default and shutdown. Ultimately, it will be important in the years ahead for our politicians to slowdown government spending with the goal of stopping the ever growing debt. We will see if we can ever muster up the political will for this to occur.
I trust you found this review informative. If you have any inquiries or wish to discuss any concerns, please don’t hesitate to contact me or any member of my team.
It’s always a privilege and a humbling experience for me to be chosen as your financial advisor. Thank you for your trust and confidence in our services.
June 2023
