Mr. Market loves to forecast a recession. This time is no different. But not every time the market thinks there will be a recession, there actually is one. So, is it possible that the market is overly pessimistic about the economy?
I’ll go out on a ledge (if I haven’t already). Barring the FED doing something REALLY stupid (which is always possible), I think the economy will have a very mild (maybe even just a ‘technical’ recession), meaning that the economy will likely have two consecutive quarters of negative GDP, but the effects will not be far-reaching or overly severe (on the whole…recognizing that if you lose your job, your opinion of its severity will differ significantly).
As you know, we believe in the saying that ‘price cures price.’ That means that high prices slow demand and therefore lower prices. Longer-term, I would expect oil to be in the $80-$100 range, down from the $115 level today (see chart below…or your recent gas fill-up receipt).
Auto prices are coming down, as demand wanes and supply chains start to get caught back up.
Housing prices have likely topped and may come down in the highest growth areas (Phoenix, Palm Springs, Florida). But housing areas with good fundamentals and will likely hold up pretty well. See the quote below from Blackstone’s Joe Zidle.
So, will the job market hold up? Let’s take a look at job openings versus unemployment. You can see that there are over 11 million unfilled jobs in the US.
And if we look at the unemployment rate, you will see that the current rate is 3.6% or roughly 5.9 million people.
Taking some of the steam out of the market will certainly reduce some of those unfilled jobs. But we are at almost two job openings for every unemployed person.
Yes, the wealth effect is real and yes, if house prices stop going up and markets pull back people will naturally spend a little less over time. But if people spend slightly less on the margin (demand is less), then prices will likely come down (less inflation). If inflation comes down, the FED will not need to raise rates as high. That is what economies do. They look for equilibrium, and in a frictionless environment, they quickly find them. It’s only when someone monkeys around with things that we get these prolonged and severe disparities between supply and demand. Think COVID and shutting down the economy. Think the Federal Reserve creating too much demand by keeping interest rates too low for too long.
Now there’s not much we can do about a pandemic, but some of this was avoidable. That’s the past, though, and now it’s time to play with the hand that’s in front of us. We believe in the resilience of the US economy. It’s not invincible and recessions are inevitable, but long-term the outlook remains favorable for the economy and for those investors who can stay the course. I was reminded recently of a great quote, which (paraphrasing here) said, “It’s never a good idea to bet on the end of the world…as you are most often wrong, or, in the rare case that you’re right, you won’t be around to enjoy your winnings.”
Getting back to our opening question of whether the market has gotten ahead of itself – the answer is that we simply don’t know. It very well could have and this correction will be limited to around 20% like most corrections of the past. In the same vein, we could very well see further downside, especially if the FED overdoes it (or another exogeneous shock hits) and the next recession (whenever that might be) is more severe than expected. Again, we simply don’t know – so we’ll continue to stay invested with reasonable guardrails in place – knowing that going to an extreme in either direction rarely plays to anyone’s favor (that applies well beyond investing!).
Have a good week and please do reach out with questions, comments, or concerns.