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Is The Bond Market Beginning to Offer Recession Concerns?

CAMS Weekly View from the Corner – Week ending 5/20/2022

May 23, 2022

In our previous edition we shared a recession watch through the lens of the bond market.  Specifically we looked at how bond market participants, when they feel recession may be coming down the pike, will sell off High Yield (“Junk”) bonds at a rapid clip in particular when compared to Treasury bonds.  In this edition we are continuing to look at the potential for a downstream recession but through the lens of the citizenry at large.  Two key macro (big picture) views that give us a sense of what the proverbial everyday person is experiencing is to look at how their general household finances are holding up. The established price inflation trend has placed wage growth rates in negative territory month-after-month.  This simply means that when wage earners turn their wages over to the consumer within themselves they cannot keep up with prices.  Their wage growth is not high enough to compensate for the price growth rate and with this the citizenry falls behind.      This leads to the obvious need to cut back on items or services that were previously purchased or planned to be purchased.  In-house we refer to this as “forced discretion” in that the consumer in us is forced, via the lack of positive real wage growth rates to purchase less of some items/services or none at all in the case of other items/services. The logical follow-on of this is household financial conditions tighten.  Two “relief valves” if you will that households lean on are saving less as well as additional debt, specifically, Revolving debt, i.e. credit card debt.

Above we have the Personal Savings Rate for the United States.  On the far right we have highlighted the rapid and consistent drop in the Savings Rate over the previous year.  The large upward spikes resulted from the various government stimulus programs fanned throughout society with the onset of Covid. Being the above view is a decade long chart we can see we are in the range of the lowest Savings Rates for the previous ten years.  The two circles highlight the time periods that were marginally lower than current day.   As the Savings Rates come under pressure it reflects households are less able to reserve portions of their income.  The established and rapid down trend reflects challenges households are having with existing price inflation relative to their income.

The above chart depicts credit card debt levels.  The above represents the previous five years which allows us to better zoom in on the recent credit card trends in the U.S. since the onset of Covid.  With the aforementioned stimulus programs households reduced their debt consumption while simultaneously paying down this type of debt rapidly.  Over the previous year we have seen a gradual trend of taking on more credit card debt from households which have then led to a rapid ascent whereby previous high levels were easily exceeded via the crossing of the red arrow up through the red horizontal line. The above charts denote households are offering distress signals in light of their wage growth rates being unable to keep up with the price inflation growth rate.  They are less able to save and are taking on debt to relieve some of the pressure. Both of these have obvious limits as to how much they can assist households in maintaining their economic way of life.  As these limits get closer to being reached the process of forced discretion, economy wide, can place stress on the vitality of overall economic activity. With this, slower economic growth can occur and yes, dare we say it, even recession. The official standard for recession is for two consecutive quarters of negative growth.  We currently have one quarter of negative growth but with little certainty that our current quarter will be negative.  With this, the official standard of two consecutive quarters of negative growth may not be imminently met. Checking in on market participants and their messaging it is imperative to keep in mind they are always operating on a forward view.  They look out into the future and attempt to determine, in today’s pricing, what is coming.  There is not an overwhelming list of evidence that collective market participants are predicting recession but they are chirping up such messaging as 2022 is unfolding. What we do know is households are displaying financial distress and if continues long enough recession may be waiting for us out there on the near-term timeline.  We continue to watch closely for early signs of such and will share accordingly as indicators offer additional clues in either direction. 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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