Over the past few months, we have seen significant market volatility. During the month of July, the S&P 500 experienced one of the best months (of July )on record. As of late, volatility has picked up once again in stocks, bonds, and commodities. An important question which has been circling financial media recently is whether or not we are in a recession. Technically, we are in Recession. Recessions are most commonly defined as two quarters of negative GDP (Gross Domestic Product) growth. In Q1 of 2022, we experienced a -1.6% loss and in Q2 2022 we lost -0.6%.(From the Bureau of Economic Analysis) Even with the traditional definition being met, there may be more to the story. Below we will take a look at some of the data suggesting differing arguments.
The Case that we are in a Recession
The Yield Curve
One indicator that has historically been used to identify an oncoming recessions is the US Treasury Yield Curve. The yield curve represents the yield an investor would receive by investing in different durations of US Treasury Bonds. During normal market environments, investors should expect to receive a lower yield for shorter term durations and higher yields for longer duration Treasuries. When volatility onsets, these yields can fluctuate based on changes in rates as well as demand from investors for shorter or longer term bonds. Currently the yield curve between 2 and 10 year Treasuries have inverted. Bears will argue this is a signal that we are in a recession.
Inflation:
Inflation can also have a huge impact in causing a recession. I am sure I don't need to tell you, but inflation is at a multi decade high. The chart below provided by the St Louis Federal Reserve shows that the inflation has been accelerating over the past few years. Inflation is a hole in the wallet to consumers. When inflation rises, the costs of housing, food, utilities, etc. (Necessary Spending) becomes a larger percentage of take home pay which leaves less money for vacations, fun nights out, gifts, etc. (non-essentials). These extra costs can slow the economy.
The Case that We Aren't in a Recession
Debt Levels for Consumers Remain Low
Consumer leverage (Debt/Net Worth) is the lowest it's been in decades. With the consumer debt at approximately 11.1% this tells us that the rise in rates may not have as much of an affect on the consumer as previously anticipated. We also haven't seen a rise in the debt % which is usually an indicator that the consumer is needing more help to make ends meet.
The Consumer is Saving
The consumer is still saving money. Even with the recent rise in inflation, the consumer is still finding ways to put money aside. When we look at the chart below, not only do we see M2 money supply (currency held by the public)remaining flat, we actually see it rising slightly. This is important because this can tell us that the consumer may not be struggling with inflation as previously anticipated.
Are we in a recession?
To answer the question from this discussion, time will tell. The examples listed above give us two different pictures. We see in some sense that financial conditions are tightening, but this may not have the affect on consumers that we previously anticipated. What is important to remember is that not all recessions are the same. Some are more severe than others. Some can cause significant job loss while others do not. Some last longer than others. Fortunately or unfortunately, we can't even agree as to whether we are in a recession right now or not.
If you have questions about your portfolio, please feel free to contact us. We stand ready to answer your questions and to work with you for long term financial success. To leave you with an important quote...
"We don't have to be smarter than the rest. We have to be more disciplined than the rest"-Warren Buffett
Disclosure:
The information above was provided by the St Louis Federal Reserve as well as our friends at Franklin Templeton's Anatomy of a Recession".
The article above does not constitute a recommendation. If you seek additional advice, please contact your financial professional.
All of the data listed above is believed to be accurate from the data sources listed above.