What’s behind the gloomy talk?
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
This potentially misattributed quote by Mark Twain is quite timely today as it seems as if every person on TV says a recession is coming and nearly every economist is calling for a recession. I’ve never seen anything like it. Closely watched leading indicators such as the Conference Board’s Leading Economic Index are signaling that a recession is all but inevitable this year. An inverted yield curve (longer-term bonds yield less than shorter-term bonds) has been a reliable warning sign. The curve inverted last year. The Federal Reserve’s rate-hike campaign hasn’t been this aggressive since 1980 which has historically led to a recession.
However, if we were to put six economists in a room, we’d find ourselves listening to no less than six opinions! With all the negativity, the economy took a curious and unexpected turn as the New Year began.
Nonfarm payrolls jumped by over 500,000 in January per the U.S. BLS, surprising nearly everyone. Taking advantage of cost-of-living raises in the cost-of-living adjustment for Social Security, consumers went on a spending spree in January.
Good news on inflation last year failed to carry over into early 2023. Moreover, upward revisions for the final months of 2022 suggest that the road to price stability may take longer than many had expected.
Confusing data and investor behavior?
Stocks rebounded in January amid hopes the Federal Reserve was nearing the end of its rate-hike cycle. A more flexible-sounding Jay Powell added to the encouraging mood.
However, the strong economic start to 2023 is forcing a reevaluation of the early optimism on rates, and last month investors reacted accordingly.
Could the economy sidestep a 2023 recession, or is recession inevitable?
Are leading economic indicators failing to account for the mountain of cash that remains on the sidelines?
Cash that was socked away in bank accounts helped many bridge the gap between wage hikes and inflation last year and could continue to do so well into 2023. Conversely, credit card debt has grown to all-time highs.
Perhaps January’s strong start was just a one-month aberration.
But the most recent data have complicated the Fed’s job, as stronger economic growth may lead to significantly more rate hikes than were expected just a few weeks ago.
Our team still advises a cautious approach to one’s targeted asset allocation. As a result of the historic recession indicators, even in light of some recent strength, and with decade plus highs in rates for short term high quality bonds, we suggest remaining conservative as we see the economic data revealed throughout this year. We continue to watch closely the earnings outlook for 2023 and the potential of a “pivot” by the Federal Reserve.
If you have any questions or would like to discuss any matters, please feel free to give me or any of my team a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.