The Fed has said it will do whatever it takes, igniting a stampede into stocks and inflating the brokerage accounts for the “haves,” but not creating jobs for those that need them, the “have-nots.” The most common question we have fielded recently asks why the S&P 500 can recover to January 2020 levels when at least 20 million Americans have lost their jobs, when economic growth has contracted by more than $4 trillion, and corporate defaults have surged over this same period of time.
We ask ourselves the same question.
The data is disastrous. A common assertion we have heard is that the worst is over, and recovery has begun. The reality is that the Fed has proclaimed from pulpits at news conferences and on 60 Minutes that the printing presses are rolling out money and Jay Powell and friends are ready for a shopping spree buying anything that is for sale. The Fed “support” is creating zombie markets: walking dead buyers gorging on walking dead companies, ones that can only survive from continued borrowing. While Wall Street gets wealthier, the unemployed on Main Street are left behind.
Taking A Step Back
Over the past year and more, we have offered the “Four Horsemen of the Apocalypse” as a framework, monitoring four pieces of data that together can indicate whether a recession is on the horizon. The reason that this is important is that it serves as a guidepost when the stock market falls by 10%; if the U.S. economy is heading into recession, the next leg after a 10% drop has historically been down and if the U.S. is not heading into recession, history shows that the drop is a buying opportunity.
Like clockwork, as these Four Horsemen appeared on the horizon, the evidence increasingly supported the view of a darkening U.S. economy. In fact, the U.S. is officially in recession with the National Bureau of Economic Research (NBER) pinning the start of economic contraction to February. The Four Horsemen symbolizing the end of the world, in this case, the end of the bull market, foreshadowed this and the omen that 10% stock market declines in front of recessions are followed by further declines proved out.
As a recap, the Four Horsemen of the Apocalypse are:
• The yield curve inverts. Specifically, the 2-year Treasury rises above the 10-year, an event that occurred in August 2019 and was met with a chorus of “it’s different this time.” It wasn’t different this time.
• Housing starts decline. A sensitive indicator, housing starts are quick to react to tepid buyers and year-over-year housing starts decline. This happened in late October 2018 and into the first months of 2019.
• Consumer sentiment peaks. Falling consumer confidence can come through in the data ahead of a recession. While sentiment stayed at higher than normal levels, it peaked in March 2018 and has turned down.
• Unemployment rises over above its 12-month moving average. The increase in unemployment was swift and sharp and this last confirmation of recession occurred at the end of March 2020.