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 Market Mysteries of the week

   Are we in a recession? 

Answer:

Don't get hung up on the semantics. We're slowing down

after the snapback from the pandemic. It's likely to be a bumpy return to normal, whatever that is.

What exactly is a recession?

Recessions are like porn. There's

no strict consensus definition

, but

you know it when you see it

. Typically, a

recession has been defined

as two consecutive quarters of declining economic production, as measured by Gross Domestic Product (GDP).

US GDP declined for the first two quarters of 2022

. So

you can call it a recession

, but

some people might debate

that the economy is just growing more slowly, not shrinking.

Most importantly,

a recession does not mean global financial collapse

. The last two recessions were more than recessions. The 2020 pandemic led to an unprecedented shutdown of the worldwide economy. The 2008 Great Financial Crisis was a complete collapse of our global financial system. Just like

rectangles and squares

, one is not always the other.

What's causing this [sort of] recession?

The pandemic

. It's not over. Russia's not helping either.

The biggest thing on everyone's mind is

inflation

.

Prices of basically everything we spend money on have been increasing way faster than consumers or businesses can handle.

It's all caused by supply and demand imbalances. When the global economy reopened, borrowing was cheap, and consumers had savings they were ready to spend. Businesses couldn't get supplies back online fast enough, though. Employees had to be hired, things needed to be built, and transportation needed to be restored. Less stuff and more buyers mean higher prices. Supply chains are still figuring it all out. The US economy only released all restrictions six months ago. China, the second-biggest economy, is

still shutting down entire cities

. As we've discussed,

Russia's invasion of Ukraine added more chaos

.

It will take time for things to get back to normal.

With the cost of everything surging, and wages not growing fast enough to compensate consumers,

policymakers are doing what they can to slow inflation

. The

Federal Reserve

has started raising interest rates from the low, supportive levels of the past couple of years. Higher rates make borrowing more expensive for consumers and businesses. Less borrowing means less spending. Less demand for the same amount of goods can release some of the upward pressure on prices.

We're seeing the slowdown effects of higher rates and inflation in the housing market. Over the past year, demand for homes has been high, but supply was low, sending home prices to record highs. Consumers had cash built up and were ready to get more space, but it took time to build homes, and supplies were scarce. Remember when people were hoarding

two-by-fours

? Thanks to the Fed,

mortgage rates have nearly doubled

since the start of the year, making homes less affordable. Demand has lightened up, and home price inflation has started coming down.

The Fed's hoping to have this effect throughout the economy, letting supply catch up to demand.

The risk is that the Fed restricts things too much, too quickly,

without having the desired effect on inflation and pushes the economy into a worse position.

What's the confusion about the slowdown vs. recession?

The data has been mixed. It's not apparent whether this is just a change of pace or a reversal of economic growth. While the economy is not growing as quickly as last year, businesses appear to be working through many of the challenges mentioned above with some success.

The jobs market is still pretty strong.

Typically recessions coincide with mass unemployment. While

layoffs have climbed

gently over the last several weeks,

unemployment is still at historic lows

. The economy added 372,000 jobs last month. There are nearly

two open roles for every unemployed worker

.

Companies can't find enough workers, so some slowdown might ease the strain on employers.

Recessions usually mean a considerable decline in consumer spending, but that hasn't happened yet.

Consumers have healthy debt levels

,

high checking balances

, and h

aven't stopped swiping their cards

. While that's great on the macro scale, looking a little deeper shows a g

rowing disparity between high and low-income consumers

. Surging food, fuel, and rent prices are eating up more of the budget for lower-income shoppers,

shifting spending

from discretionary items like clothes and electronics. Without some relief on those costs, it could lead to broader issues.

Travel budgets are usually the first to be cut in a recession, but the travel industry is booming.

Airlines are a logistical mess, but there's so much demand that they're

able to raise prices enough to beat pre-pandemic revenue

while flying fewer flights.

Hotels are doing great

.

People usually delay car buying in a recession, but

automakers are doing fine

. Ford

tripled its operating profit

from a year ago and sold out nearly all of its 2022 models.

Major automakers

are working through supply chain issues and expect strong sales growth. Still, given the broader sentiment,

most companies are slowing their hiring and tightening expense budgets

.

Why is the stock market up +10% in the last month?

First of all, t

he stock market is not the economy

. It rises and falls on the confidence in the profit-making ability of America's biggest ~100 companies. Major corporations will likely not be the worst affected by this crisis. The bottom 99% and

small businesses are struggling the most

with the current economic challenges of rising costs and limited supply. Small companies don't have the same resources to attract workers, raise wages, or manage surging costs as easily as corporations.

Small businesses make up half of all employment and nearly half of GDP

.

The biggest companies can do just fine while the rest of the economy struggles.

Investing is a bet on the future, so

the market falls or rises in anticipation of what's to come

. With

most investors expecting the absolute worst

, recent corporate updates have been better than expected. There are some indications that inflation has peaked, with gas and other commodity prices falling. So investors are hoping the signs of a slowing economy, combined with declining inflation, might encourage the Fed to pause its restrictive policies.

Should I be worried?

The good news is: that almost no experts believe we're headed for a real systemic crisis.

Don't expect 2008 again anytime soon.

The bad news is: that

this is likely going to be a challenging few years

as we navigate beyond this unprecedented moment in human history. There will probably be ups and downs, with random shortage and abundance. Focus on your financial stability. Build your emergency cash savings. Pay off your high-interest debt. Invest only with a long-term mindset.

We're here whenever you need us.

💙 The Share Scoops Team

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