The stock market continues to soar higher this year, defying the gravity of higher interest rates and ignoring recessionary storm clouds. Nearly all of the more reliable indicators are still signaling a recession. In fact, the stock market - itself an economic indicator - is the only bright spot in the Leading Economic Index.
In its most recent press release, the Conference Board states “The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”
Historically, the time between an initial inversion of the yield curve, where short-term interest rates surpass longer-term rates, and the onset of a recession has been between 6 and 24 months. That fits right in with the Conference Board’s expectation. The market, however, seems to be banking on the fabled "Soft Landing", where the Fed raises interest rates just enough to choke off inflation without also strangling the economy in the process. Such outcomes are extremely rare, seemingly occurring just once before. But maybe this cycle will make it twice.
Many economists have retreated recently from a “recession-is-inevitable” mentality, largely due to the latest inflation readings and strong employment figures. In spite of some high-profile tech-related layoffs earlier in the year, the unemployment rate has remained historically low. At the same time, inflation (as measured by the Consumer Price Index) is already back down to 3% year-over-year, getting there much faster than most economists expected. Should that continue, the Fed may find the latitude it needs to ease rates again before the economy tips fully into recession. If that’s the way it ultimately plays out, it will be the first time that many of these indicators are proven wrong.
Still, it is probably unwise to simply ignore the warning signs altogether. Recessions are rarely as broadly anticipated as this one has been. It would be historically fitting, therefore, to have market sentiment shift in a more positive direction and see stocks climb, only to have the rug pulled out from under investors just when they think they are on sounder footing.
The stock market is not quite as healthy as it may appear on the surface either. Performance this year has been mostly attributable to the technology sector. According to CNBC, the seven largest companies in the S&P 500, all technology-related, are up 86% on average through the end of the quarter. Meanwhile, the other 493 companies in the S&P 500, in aggregate, have barely moved this year, by comparison. A similar dichotomy exists between more speculative companies, many of which are rebounding sharply after suffering enormous declines in price in 2022, and dividend-paying stocks, which are only marginally higher as a group this year.
As always, when it comes to financial markets and the economy, little is certain and developments often leave even the experts scratching their heads. It does keep things interesting though. And we will be here for you, whatever comes.
The information above represents the opinion of financial advisor Travis Rus, and is not necessarily that of Raymond James. It is not a complete summary of all available data necessary for making an investment decision and does not constitute a recommendation, nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Investing involves risk and you may incur a profit or a loss. Past performance does not guarantee future results.
The S&P 500 Index is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Inclusion of this index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance.
