It’s in the news – everywhere – talk of recession and all the negative feelings that word calls up. Well, are we in a recession? And why do we care if we are or are not?
Are we in a Recession?
For most of us, a recession usually means that the economy has slowed to a point that both our portfolios and possibly our employment situation have deteriorated substantially. In truth, the academic definition of a recession touted by many, two quarters of GDP decline, does not always present as a true recession.
It is difficult to say we are in a recession when we have a manufacturing index, while slowing, still at expansion level of 52.8, we have full employment, currently at 3.6% and there are still over 10 million more available jobs than unemployed seeking jobs. (Bloomberg, 8-2-22) To quote Chair Powell – “The labor market is very tight,” and with 2.7 million jobs created year to date and a manufacturing economy still expanding, I agree – it is hard to hold to a position that says we are in recession.
As investors we don’t like even the mention of recession because that means our portfolios will suffer – and they have so far this year. Equity positions have rebounded recently, but we are not back to last year’s levels. Market valuations, however, have come back to a more rational, comfortable level and so may be at a level that suggests its pricing anticipated the engineered economic slowdown the Federal Reserve is attempting in order to curb and reduce inflation.
There remain indicators of a recession just over the horizon, perhaps in 2023 or later. The bond market is signaling this possibility with its “yield curve inversion” – 2 year Treasury rates higher than 10-year Treasury rates – most often an indication of recession in twelve to eighteen months.
How fast and how aggressive the Federal Reserve will be in raising its Fed Funds rate will be a significant contributor to the likelihood of either an economic slowdown or a true recession. Chair Powell in his recent press conference reiterated the Committee’s priority of taming inflation, getting back to price stability, over their other mandate, full employment, which they feel is strong enough now to take the hit of higher interest rates in the short term. We see reports of large employers putting a hiring freeze in place, but this is a long way from large layoffs. The labor market seems to be adjusting, quits are slowing, and we expect to see progress on the employment supply/demand come back into some balance.
The bond market seems to be settling back into an anticipation of lower inflation. The 10-year Treasury rate has come down from over 3% to 2.69% (Bloomberg 8-2-22). This should be good news for the equity markets too as it suggests the Federal Reserve will not have to be so aggressive in raising interest rates.
Volatility will likely remain heightened as markets swing and react to each new data point. The Federal Reserve will also be analyzing new data as they decide the pace of interest rates increases – their “data dependent” message.
We believe sensible investors will remain alert to trends while refraining from overreacting to market fears. Our answer has been to stick to an investment discipline that requires diversification, patience, and a little humility.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.Re