I wanted to tie in a little more data concerning my strong opinion re a coming recessionary environment. I wrote about the opportunity surrounding a recessionary cycle in my last blog. To start, here is a quote out of Barron’s research – note my highlighted elements from this report in bold:
“An influx of data showing softer consumer spending, sagging sentiment and subdued manufacturing suggest a US economy with a more fragile foundation, prompting several forecasters to lower their estimates for growth. Notably, inflation-adjusted personal spending declined in May for the first time this year, and gains in each of the prior four months were revised down, indicating that demand earlier in the year was weaker than previously thought. Home sales and manufacturing surveys are also showing signs of trouble. The weakness in consumer spending, which is by far the biggest contributor to US gross domestic product, compounded the souring outlook that already had some optimists turning cautious earlier in the week. Morgan Stanley economists now expect GDP to grow at a 0.3% annualized rate in the second quarter, down sharply from 2% just days ago.” – Barron’s
So – we have an already slowing economy, per above. Meanwhile, rates are rising. Oh, what a tangled web we weave!
Comparing tightening cycles
How does this tightening cycle compare to prior cycles? The most notable difference is the speed and size of the interest rate increases. The chart below (Market Desk) compares the current cycle’s fed funds rate path against the last five cycles. Factoring in the +0.75% increase at this week’s June meeting, the Fed has raised interest rates +1.50% since the first increase in March. Investors expect the Fed to return to its +0.50% pace at the July meeting, which would make 2022 the fastest +2.00% increase compared to the last five cycles. The Fed is expected to keep raising interest rates at its meetings later this year, although the amount of the increases remains an open question.
The chart shows the current Fed tightening cycle (yellow line) has more in common with the 1988 and 1994 cycles than post-2000 cycles- see my annotations. It’s a market environment investors haven’t experienced in a long time. The Fed’s aggressive actions are driven by widespread price pressures across food, energy, housing, airfares, vehicles, etc. There are concerns high inflation could become entrenched. This, as well as significant uncertainty about how high and fast the Fed will need to raise interest rates to contain inflation.
Meanwhile, we have falling GDP growth. Tightening usually occurs in a strong economy. This inflation thing is really messing with the formula! Hey, at least the US Fed finally came clean on this probability. One day after I published my last blog, they came out with this statement, admitting recession risk is increasing. As I noted on my “3 steps” blog here, this is a sign that we are completing step 2 (Acknowledge inflation, but deny recession potential).
It appears we are about to enter step 3 (Acknowledge recession, rates rise less, then rates reverse to an easing policy).
ValueTrend once again beat ’em to the punch – although our view is–its almost an inevitability!
Now, here’s the important part. Read my blog on “Massive Opportunity” from last week. The need to squash inflation raises a particularly concerning risk….How do you fight inflation and not cause recession when growth (per the top of this blog) is already slowing? They got us here in the first place (again, see my “3 Steps blog), and I have no faith they will get out of their self-made mess. Thus, ValueTrend’s conclusion remains – A opportunistic recession trade coming! There are patterns that repeat in economic cycles. We can profit by them – and this opportunity may arrive this fall.
Markets often base and break out in the early stages of recession!!!Be prepared to profit on this pattern. Again, see my blog from last week.
The near term
I will be posting my monthly reading of the Bear-o-meter in the next couple of days to provide you with the current risk/reward profile for the markets. Stay tuned for that.
In the meantime, somebody asked me why I highlighted tech stocks and the NASDAQ as being opportunistic in Step 3. To be clear- we at ValueTrend have not re-entered…yet. The opportunity will appear when the market “officially” enters recession. I covered my outlook on a couple of videos 2 weeks ago, which tied in some charts to insider trading trends of late. You may find them useful for planning as we enter into Step 3 of the current Fed policy moves. For those videos, and other insights, be sure to visit the video page here. Subscribe to the videos receive this type of content, which often differs or expands on concepts that I discuss on this blog.
Final note: Do a friend a favor. Show them this blog. Encourage them to subscribe. And while you are at it, don’t be afraid to comment or ask questions. The thoughts in your head are echoed in others, I am sure!