The Biden administration says that we are not in a recession. Historically, two consecutive quarters of negative GDP is the criteria for a recession.
Perhaps the President may be correct except for the fact we have, “Seven Recession Red Flags Waving Right Now!”
Besides this pattern there are other red flags pointing to a further slowdown:
Housing has been a major driver of economic growth over the past two years but now appears to be slowing dramatically due to recent rate hikes, according to InvesTech Research.
The National Association of Home Builders reported that both the Builder Confidence Survey and the Traffic of Prospective Buyers Survey continue to crater as rising home prices and decade high mortgage rates are keeping potential buyers on the sidelines. The association went on to state that conditions have gotten so bad that we’re now in a “housing recession,” which could seriously contribute to the depth and duration of an economic recession.
The 2-year versus 10-year Treasury yield curve recently inverted once again, meaning that the shorter-term investment is actually yielding more than the longer-term investment. Historically this inversion signals a recession. The last time it inverted this much was the year 2000 after which the S&P 500 fell another 48.1% to the eventual bottom. Of course, it doesn’t mean it will play out the same way this time but investors who ignore such a red flag do so at their own peril.
The University of Michigan Consumer Sentiment Index hit a reading of 50 in June which was a “70-year low,” and it’s still hovering around that level. The average reading is close to 90 and every time it has dropped anywhere near current levels since 1964, it has always been accompanied by a recession. In spite of positive reassurances from economists and Fed officials this would historically cement any question as to whether or not we are in a recession.
Also keep in mind that aggressive rate hikes by the Fed have historically led to a recession, because such action slows economic growth and causes unemployment to rise. The current rate hikes are occurring at a pace and magnitude not seen since the early 1980s. This includes two 75 basis point rate hikes in both June and July. The last time the Fed raised rates 75 basis points prior to this was 28 years ago.
Remember also that rising interest rates cause earnings of companies to decline, which in turn causes their stock prices to decline. BlackRock, the largest money manager in the United States, in their August 15 weekly commentary stated that “the risk of disappointing earnings is one reason we are tactically underweighting stocks.”
Finally, according to InvesTech Research, the most volatile years in the stock market occur in bear markets, and some of the bigger bear markets have seen 1% to 2% swings on nearly half the trading days in the calendar year. If we extrapolate the number of 1%-2% moves in the S&P 500 so far in 2022 for the full year, we are in rarefied air. In fact, if this pace of volatility continues it will be comparable to some of the most severe bear markets of the past 60 years (1973 -1974, 2000-2002, 2008-2009).
The Bottom Line for Investors
In spite of all of these major red flags pointing to a recession, could we still be near a market bottom heading for a soft economic landing? It’s possible but not likely.
The entire Biden administration is incompetent, from the Department of Defense to the Department of State and everywhere in between. The entire administration needs to be fired and replaced by competent Americans.
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I agree with virtually everything you write here, Sam with just one quibble with this statement: “The entire Biden administration is incompetent, from the Department of Defense to the Department of State and everywhere in between.”
Biden and his ‘administration’ are not merely incompetent. Nor are they merely misguided or misinformed. He and they are downright MALICIOUS. His and their most destructive policies and actions were not done on the basis of a principled disagreement with the opposition but to DELIBERATELY DESTROY an essential component of the American economy; the so-called Fossil Fuel Industry and, in no small measure, because Donald Trump was supportive of that industry.
IF, indeed, the IC engine powered vehicles are obsolete and need to be replaced by battery-powered Electric vehicles then The Markets will devise the means to that end exactly as Henry Ford and other pioneers in the automobile industry did 100 years ago to displace the Horse as the prime mover of the American Economy. If History has taught us nothing else it should have taught us that government intervention in markets ALWAYS has DISASTROUS results. This time will not be any different from any of those past times
Not just a sector, their goal is to destroy our economy entirely–turn back the clock to the Dems’ “glory days” of shantytown Hoovervilles and FDR having unchecked power.
Well stated my friend!