May 12, 2023
Good morning,
Recall last fall’s broad consensus among economists and market strategists of a recession in the first half of this year. That message was the primary driver of last year’s equity market decline. The big surprise this year is the economy’s resilience and the market backing out the recession discount by rallying to the upper level of the S&P 500’s nine-month range.
It appears that a recession has not materialized yet. This has been confirmed by the Atlanta Fed’s GDPNow model, which projects a firm 2.7% real growth for this quarter (Q2), plus a robust April employment rate of 3.4%, the lowest level since 1969. But no recession now does not eliminate a recession later this year. Perhaps economists and strategists were right last fall – just early.
There are an increasing number of signs warning that the clock is ticking toward recession. One example comes from a legendary analyst, Marty Zweig. It uses the Fed’s three hikes in short-term rates to suggest a possible stumble in stocks. Of the 17 prior signals, 14 have correctly called recessions in advance — not perfect, but a useful warning sign. In any case, the latest sell signal was in June of 2022, and the median signal came 16 months before the start of a recession. This suggests a recession starting around October of 2023.
There are a number of other reliable indicators that suggest a recession should be starting before October. The negative yield curve and falling money supply. The declining leading indicator indexes. Signs of softening employment. Tightening bank loans. And several economic timing models – agency and private. This would be a four-page report if I described all of these in detail with charts and explanations. If you would like more detail, just email me and I’ll be happy to oblige. I’d like to create more two-way traffic from these notes anyway.
Have a good weekend.
Be well,
Mike