In our 2020 fourth quarter report we cited a projection from local ‘futurist’ Glen Hiemstra about the re-opening of the economy and dealing with Covid:
“It’s going to be a very cautious restart for most people. Until July 2021, we won’t be traveling much internationally or even nationally. Assuming there is a robust vaccination program, this pandemic will be in our rearview mirror in two to three years (in other words, July 2022 to July 2023). Then there will be an explosion of joyful business activity. So by five years from now, I see a new renaissance, an exuberant rebirth of the national economy & possibly global.”
By and large events seem to be unfolding as he suggested – at least with respect to resumption of travel and related business activity. While we have what can be described as a robust vaccination program (at least nationally) we have yet to see the explosion of joyful business activity. Yes, we have seen restaurants busier, airlines and hotels bookings rising but some businesses seem constrained by available labor and still-restricted supply lines resulting in diminished sales. Meanwhile, COVID and its mutations remain ever-present.
For an economy in which businesses absorbed cost increases for fear of losing sales, businesses are now more at ease to pass along to customers those increases. The results? Inflation running 7-8%. This coupled with a Federal Reserve that wants to contain inflation but doesn’t want to overstay their tighter money policy and risk inducing a recession in an economy that is already slowing.
A couple of bright notes to observe:
- In the last 50 years, the U.S. economy has not had a recession save for once when unemployment statistics have been as low as they are now. Although at this writing we are very close to the traditional definition of two consecutive quarters of negative GDP growth.
- The St. Louis Fed Financial Stress Index which measures the degree of stress in the U.S. markets via readings of economic variables that tend to move before changes in the overall economy is showing below average stress on our financial markets.
Might we already be in a recession? Quite possibly and that may be the message of our stock market. Companies added more than one-half million workers since the start of last year perhaps driving unemployment to unsustainably low levels. Could employers have had a case of FOMO – fear of missing out – on the potentially mistaken notion that economic rebound was on its way and they needed to hire. Combine these staffing levels together with high product inventories in some sectors and you have the makings of a weakening economy.
How is a recession recognized? The traditional method says whenever there are two consecutive quarters of negative GDP growth a recession is underway. In actuality, the National Bureau of Economic Research (NBER) has the responsibility of determining when a recession begins and ends. According to the NBER:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
The NBER looks at a multitude of factors before declaring the U.S. economy is in recession. Since a recession is a broad contraction of our economy, NBER reviews economy-wide measures of activity.
So…are we currently in a recession? Not according to NBER; while we had a – 1.6% GDP report for Q1, unemployment remains strong as recently released data indicate with the unemployment rate and growth in both private and manufacturing payrolls.
Lastly, before we review our stock and bond strategies, a few comments about Crypto currencies -since we are frequently asked – from the editors of Bloomberg:
- With each passing day, the brave new world of cryptocurrencies is looking more like the perilous old world of Wall Street circa 1929 or 2008. Supposedly stable investments are proving to be anything but.
- Crypto is not an asset class. Stocks and bonds have cash flows. Commodities have industrial uses. Digital tokens have nothing but sentiment. Someday, they might prove useful as representations of assets, making transactions cheaper and more reliable. As things stand, buying them is pure speculation, not investment.
- Don’t let the financial system get too exposed. If banks had made a lot of crypto-backed loans with regular folks’ deposits, the crash would have been a lot worse. Regulators have rightly leaned against this and should move ahead with rules to ensure it doesn’t happen in the future.
- The two largest cryptocurrencies – Bitcoin and Ethereum – have lost more than $1 trillion in market value from their peak in late 2021.