For the last month, recession fears have been all the buzz. In the first quarter of 2022, we saw the real economy fall by 1.6% on a quarter-over-quarter basis. Second-quarter data is not in, but more timely indicators have been pointing towards a second straight quarter of economic contraction. By historical standards, two consecutive quarters of economic decline has typically signaled the start of a recession. However, it is a common misconception that there is an official definition of what constitutes a recession. In reality, the NBER (National Bureau of Economic Research) dates recessions based on a wide variety of economic indicators.
With this context, June’s jobs report is particularly interesting. The US economy added 372,000 jobs. This was far above economists’ estimates and not at all consistent with a recessionary environment. Despite softening in housing, consumer sentiment, and manufacturing, the labor market remains exceptionally robust. With unemployment near a record-low, it is difficult to say a recession is at hand.
From the Fed's perspective, this report could be puzzling. Despite significant tightening in a relatively short period of time, the jobs market and wage growth remain red hot. We will know more after we have June CPI data, but it appears the Fed has a long way to go to bring inflation down. Its tightening cycle has likely only just begun.
The equity market has been trying to make a stand as it digests this information. For much of the past month, the 10-year treasury yield has been falling on recession fears. Growth stocks have bounced, but the bounce could prove short-lived if the 10-year yield resumes higher. We will be watching the value/growth relationship closely for leadership cues as we move forward.
For now, we continue to emphasize not fighting the Fed. They are on a path to bring down inflation, and tightening will continue at a fast pace. Though we may not be in a recession now, there is still a high probability that we will be at some point over the next year. For us, that means our defensive tilt is still appropriate. Domestic, essential, energy immune companies with pricing power are still the place to be.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.