This is the most anticipated recession in history. I’m not saying this, it’s the survey that the Federal Reserve does for economists (the Survey of Professional Forecasters) and it has come to provide a more than 40% chance of an economic recession in the next 12 months, a level that was not seen since 1968. This hasn’t been achieved since the survey’s inception, which is saying. On the other hand, The Conference Board, a non-profit organization dedicated to the study and analysis of economic cycles since 1916, gives a 99% chance of a recession according to its model. In fact, its own popular leading indicator of the US economy has been falling at negative rates for months, something that usually happens before and during a recession.
Even the interest rate curve, for example the spread between 2-year and 10-year US sovereign bonds, has clearly inverted since July 2022, a phenomenon that often precedes a recession. .
Everything points to a slowdown; Almost everyone thinks there will be a recession; Even the economists at the Federal Reserve, not their boss Jerome Powell, think so. But the interesting question right now is when will the recession hit? And the bigger question is, does it really matter from a stock investor’s perspective?
Many people think that a recession is when there is at least two quarters of negative GDP growth. The National Bureau of Economic Research, the body in charge of officially dating the beginning and end of economic recessions in the United States, doesn’t even have a precise definition of what a recession is, saying simply that they don’t count enough There are declines. Economic activity that is widespread throughout the economy and extends beyond a few months. This way, the body reserves the right to never cross its fingers and is able to point ex post and with complete ease when deceleration occurs.
However, from my experience, what really signals the beginning of a recession is when jobs start to be lost and, in particular, what the monthly employment data from the so-called Establishment Survey shows. When these figures go from job creation to job destruction, eventually everyone accepts that the economy is indeed in the process of contraction.
What’s more, this particular information is what caused a tsunami in the financial markets, because once it started destroying jobs, the Federal Reserve was forced to act on the second part of its legal mandate. , which is to maintain the max. Potential job creation, which means that official interest rates will probably have to be lowered to achieve this objective.
Now, with 253,000 jobs created in the month of April, it seems hard to think that we are nearing a recession by this metric. However, this data is usually delayed and other alternative and more advanced indicators of the labor market have started showing red alerts that, sooner rather than later, it is likely that jobs will begin to be lost.
For example, the Employment Trend Index, calculated by the aforementioned Conference Board, and which is based on eight sub-indicators considered key labor market indicators, has been declining markedly since mid-2022, and historically this indicator data from the Employment Official The decline has begun before. 8 months on average.
In another example, the number of jobs offered by companies has already fallen by more than -15% from their maximum, something that has happened since at least World War II, in the opening moments of each of them. Is. Economic recession in the United States.
And, last but not least, unemployment claims have consistently increased by 25% year-over-year, a figure that, since the series’ debut in 1968, has always coincided with the economy’s entry into recession. As can be seen, official data may still show expansion in the labor market, but behind the kindness of this data are strong signs of an imminent slowdown. And, in particular, these data should be telling us that it is likely that either a recession has already begun, or that it will do so during the summer.
Having answered the first question, what is important now is to answer the second, whether, from an investment perspective, it really matters to know that we are entering a recession.
My answer is that probably not, or at least that it will not have the results many people expect. Markets discount expectations and when we talk about the most announced and predicted recession in history, it is very likely that the markets have already discounted it before anyone else.
In fact, there was a sharp stock market decline in 2022 as markets anticipated that a rapid increase in interest rates by central banks would lead to an economic recession. As I expressed in this same column on February 27th, I am of the opinion that when the jobs are finally destroyed, it will be a very bullish factor for the stock market, as markets will celebrate that, finally, they will see official interest. be able to reduce. Rates. And at a lower cost of money, higher valuations can be accepted for the shares.
