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About That Guaranteed Recession

CAMS Weekly View from the Corner – Week ending 1/13/2023

January 16, 2023

Interested in a head spinner? This edition offers the potential of such with the paragraph immediately below attempting to sum it up succinctly.

Are collective market participants currently discounting the end of an expected coming hard recession – that has yet to materialize – which they are convinced will morph into a downright ugly economic landscape? (Probably should read a couple of times.)

Let’s attempt to break this down a bit.

For context we are consistently bombarded from various viewpoints through various communication sources assuring us, if not guaranteeing us that a hard economic landscape is heading right for us with a frequent simultaneous caveat that it most likely has already begun. This has been going on in recent months and is building in momentum it seems.

As a foundation piece for this edition it is imperative to keep in mind that market participants are focused on the near-future and as they look out into the future they price assets today according to what they think they see out there on the timeline – hence they discount the future and with this markets are looked at as discounting mechanisms.

Through this is where our current day market landscape/collective narrative begins to get strange.

Seemingly market participants are convinced (or are they?) a difficult recession is heading right for us as offered through various market narratives from the everyday analyst up and through the most recognizable names in the econ forecasting business. Any day now – holy hell will commence – the extreme short version.

If this is the case and is so obvious (full disclosure we ourselves can chime in on this narrative as there is a wealth of concerning developments to be sure) why are markets generally acting as though we will be coming out of said hard recession soon? A hard recession we remind everyone that has not yet arrived – can you say strange?

So with this, market participants see the inevitable hard recession right there on the horizon with a belief it will be difficult but they are simultaneously beginning to price assets as though it is coming to an end soon (discounting the future) even though it has yet to arrive. (Sorry had to write essentially the same two paragraphs – because it is that strange.)

Many Questions – So Many Questions

As we have been contemplating this developing mind twister while participating in markets and simultaneously processing econ data we experience a litany of self-surfacing questions that come in rapid fire succession. There are too many to share in this edition but we will scratch the surface just a bit.

A significant piece of the expected coming hard recession is the underlying cemented belief (a belief that has been flying around now, give or take for a couple of years) that the housing market will become a scorched earth type of market by the time the ravages of the (expected) hard crash is done.

With this in mind, strangely, for the previous month, two months, three months as well as thus far in early 2023 (think a building trend) housing related companies have handily outperformed stock market indices which is to say they are exhibiting upside leadership. Wait, don’t they know housing is crashing or is supposed to crash?

Importantly, we are talking about collective market participants here where they can make or lose billions of dollars collectively by getting this wrong. With this they do not flippantly position for upside pricing such as they have been doing. This means something – exactly what – we are not sure although we have various thoughts/reasons for such which are outside the scope of this edition.

Employment Market

A well known fact within the analytics community is that employment numbers are considered to be a lagging indicator. This simply means that in an analytical toolbox it is not the first tool of choice when trying to decipher what collective market wisdom is offering relative to their forward econ views.

With this said though, an off-shoot of employment is unemployment – specifically Weekly Unemployment Insurance Claims. These can be considered a tip of the spear in a sense for the employment market and through this as a more forward looking indicator compared to “how many jobs were created in X month.”

Strangely, while keeping in mind (again per the collective narrative) that a hard economic recession is on the immediate horizon and has probably already begun which will be led by a housing market implosion that too has already begun and yet, with this, companies at large are not laying off workers. Have companies, collectively speaking, suddenly become philanthropic toward their employee bases?

Shouldn’t we be seeing at least a little bump in Weekly Claims in light of less demand for products/services that comes with recessions? We know companies are reluctant to lose workers in light of their difficulties in attracting workers but business economics can only allow for this on a limited scale.

To this point we continue to see, week after week, to include last Thursday’s updated Claims data, Weekly Unemployment Insurance Claims posting low 200K numbers. For historical perspective, when on the precipice of recession and into a recession we see that these numbers consistently hit 350-400K levels weekly – double our current run rate.

The Bond Market

The bond market is often viewed as the smartest market. When you are playing for basis points you need to be real sharp collectively speaking. This smart market is acting quite strange if we are walking right into a hard recession or even a mild recession.

There are several discussion points here as well but focusing on one area we point to the CCC and below rated corporate bonds.

Triple C’s are rated as such because their creditworthiness is quite low. Keeping it simple, in good times these bonds are viewed as one step from the critical care wing. Enter troubling economic times or expected troubling economic times (remember markets are forward looking) and these bonds are carted off to the mortician.

Strangely, the yields on triple C’s topped out in early October and have built a slow motion downtrend on a yield basis.

In layman’s terms this means bond market participates have been bidding up the prices of these incredibly economic sensitive instruments which is the exact opposite of what bond participants collectively do when they surmise a difficult economic landscape is approaching.

Are We Sure Collective Participants See an Imminent Recession?

With the above snippets of viewing behavior through various market lenses we cannot help but ask/wonder/ponder if the collective narrative that recession is a certainty may be a belief that is not shared by collective market participants.

It seems, if employing economic logic, some historical understanding of various market relationships and an unbiased view of various economic measures of late that collective participants are not in sync with the aforementioned collective economic narrative. If they were markets would be setting up differently than what we are currently witnessing.

So either the narrative is wrong or collective market participants forward view is wrong or both will meet somewhere in the middle some months down the timeline.

Importantly, the forward view of collective market participants is not historically infallible so their messaging in this timeframe, as in others, could prove to be incorrect resulting in a notable retreat from current developing trend attempts.

And speaking to the collective narrative – has the economy slowed via various economic measures – absolutely yes – but imminent recession that leans into a very hard recession – not currently.

It is that last part that seems to be where market participants are coming down on this which will prove to be very interesting whether they have got it right or not down the timeline.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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