Every investor realizes that recessions and bear markets go hand in hand. But the definition of a recession often seems more difficult to define. Are we in a recession then? And if not, does that mean disaster has been averted or the pain train is still rolling toward investors? This is an important debate because it helps us understand what lies ahead for the stock market (SPY). We’ll cover this vital topic in this week’s commentary. Read more below.
In previous comments I have oversimplified the definition of a recession into the common belief that a 2 quarter contraction of GDP means recession. If it was that easy… the case would be closed as Q1 and Q2 were both negative.
But with most things about investing… it’s never that easy. And not everyone adheres to this definition.
Or maybe we could use this old economist joke that also tries to define recession:
What is the difference between a recession and a depression?
A recession is when your neighbor loses his job… a depression is when you lose your job.
Yes, this joke might explain why most economists aren’t in the standup comedy circuit 😉
At the end of the day, the official arbiter of what defines a recession is the National Bureau of Economic Research, which normally weighs in months after the fact. This means they haven’t called this a recession yet…and probably won’t if you appreciate the following definition: FAQ section of their site:
“The NBER’s traditional definition of a recession is that it is a significant drop in economic activity that is spread across the economy and that lasts more than a few months. The committee believes that while each of the three criteria – depth, distribution and duration — which must be met to some extent individually, extreme conditions revealed by one criterion can partially offset the weaker indications of the other.For example, in the case of the peak of economic activity in February 2020 , we concluded that the decline in activity had been so large and so widespread in the economy that the downturn should be classified as a recession, even though it turned out to be quite brief.The committee then found that the low was two months after the peak, in April 2020.”
However much they tried to make it accessible to the layman, it still leaves much to be desired. The main thing they need to see is PAIN. And the key measure of pain is job loss, which is a key indicator that remains positive, as we saw in today’s surprisingly robust government employment report.
On the other hand, I stand behind what I said in my Reitmeister Total Return Comment earlier this week in the section below:
Employment is still strong: This is everyone’s favorite point to bring up. However, most people are not economists… because if they were, they would know that employment is a lagging indicator. Often it still looks good because things go straight down the toilet.
That’s where we are now. But the more inflation stays in place… the more damage is done… the more likely job losses will follow, leading to:
Lower revenues > lower expenses > lower corporate profits > lower stock prices.
Note that Weekly Jobless Claims is the most telling indicator of where monthly job growth and unemployment rate will be in the future and that this is getting worse week after week as you will see in the chart below.
So I believe this is the next shoe to drop to put a sword in this faux bull rally that leads back to the return of the bear.
If job growth were this strong today, it would seem to negate the recession premise. If it’s right…why did stocks fall on friday?
While we may not be in a recession CURRENTLY, the Fed will unfortunately feel all the more encouraged to raise interest rates aggressively, increasing the likelihood of economic damage later on.
This means that the chances of a recession in the future are still high, especially if you appreciate this plethora of aggressive comments from Fed members and collected by SeekingAlpha.com:
St. Louis’ James Bullard: “I think inflation has come in higher than I expected in the second quarter. Now that it’s done, I think we need to go a little bit higher than what I said before.”
Mary Daly from San Francisco: “[The Fed is] not nearly ready. We’ve got off to a good start and I’m really happy with where we’ve come so far, [but] people are still struggling with the higher prices. My modal outlook, or the outlook that I think is most likely, is really that we raise interest rates and keep them there for a while at the level we see fit.”
Charles Evans from Chicago: “If we don’t see improvement for too long, we may have to rethink the path a little higher. We want to see if the real side effects will come back… or if we have a lot more ahead of us.”
Loretta Master of Cleveland: “We have more work to do because we haven’t seen that reversal in inflation. It should be continued evidence over several months that inflation has peaked for the first time – we haven’t even seen that – and that it’s going to goes down.”
The point is, we’re not technically in a recession. BUT definitely still have a good chance it could be on its way in the coming months. Especially true with a Fed determined to crush inflation… which is likely to dampen the economy, including job losses.
And yes, dear friend, the Fed’s track record in creating recessions is greater than its chances of a soft landing. Therefore, it is difficult to really get behind the statement that the new bull market is near.
Could there be more upside to the recent stock price action?
Yes. That’s because stock prices fluctuate from fear to greed. And at any extreme price, they go too far. So it’s very common to overshoot before prices return to a more rational standpoint.
But looking forward to the end of the year and to 2023, I still believe we haven’t seen the lows of this bear market. Just remember that the Covid bear market that lasts only a few weeks is the extreme quirk. Much more common is a 12-18 month venture with erratic price action before the final capitulation bottom is found.
Very little about the June 2022 lows feels that way to me. However, I am open to the possibility that this time is different and that a new bull market has started. Stranger things have happened. But again, the odds are against that outcome with more pain ahead.
What to do?
Right now, there are 5 positions in my hand-picked portfolio that will not only protect you from the bear market, but also lead to big gains as the stock moves lower.
This strategy fits perfectly with the mission of my Reitmeister Total Return service. That is to provide a positive return…even in the face of a roaring bear market.
Yes, it is easy to make money when the bull market is in full swing. Anyone can do that.
Unfortunately, most investors do not know how to generate profits when the market falls.
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SPY shares closed at $413.47 on Friday, down $-0.70 (-0.17%). Year-to-date, the SPY is down -12.30%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock selection.