If I could have a dollar for each discussion that I have had about the next recession, I could retire today.
It is the talk of the times, I guess. I even spent the last webcast talking about it myself! One thing that we always need to understand is that we simply cannot have a recession if businesses are hiring, producing goods, have positive earnings growth and unemployment is not rising. This all produces positive Gross Domestic Product (GDP), and recessions occur when we have negative GDP growth 2 or more quarters in a row.
What keeps us all from sinking into recession under the status quo? Businesses have credit available to them at low costs thanks to the low historic interest rates. They use that credit to buyback their own stock and meet payrolls. How long it can continue is largely up to the amount of money in the economy that can be used cheaply to support those activities.
The reason unemployment and layoffs are so critical to watch is that they have a much faster lead time to recession than things like yield curves. Every recession post-WWII has seen a trough in unemployment rates no more than 16 months before the next recession. Without that happening, we have not had a recession.
What can we watch to understand where unemployment might begin to rise looking deeper into the data? Businesses tend to resist laying off workers when they can simply hire temporary help, temporarily layoff workers, reduce workweeks or hire only part-time workers for economic reasons. We simply have not seen any change in the longer-term trends in how businesses control labor costs yet. It is always where then go first when there is stress on their books. Labor is expensive to business.
Until we begin to see more evidence that economic slowdowns are likely to outpace the Federal Open Market Committee actions of reducing interest rates to keep the economy expanding, a recession is could be unlikely for at least another 9-12 months. Evidence supports increasing risks, but absent a recession, we are likely to continue to see stock market gains in the mid-single to average range. Over the longer term, things get much riskier as the track record for Fed actions to be able to avoid recession versus postpone them is simply dismal. It has never happened.
The best thing that investors can do in this market is remain patient, alert to the underpinnings of the economy, resist the urge to make dramatic changes based on headline risk alone and make sure that you have a strategy that can be relied upon in the event of market breakdown.
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