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The Recession That Didn't Happen — Bears Aren't Thrilled

Published 05/16/2024, 03:15 PM

By now, analysts still calling for a recession in the good 'ol USofA find themselves in the minority and maybe even at risk of losing his or her job. At the beginning of last year though, the chorus of those expecting the economy to falter was strong.

After all, the Fed was hiking rates at one of, if not the fastest paces in history, the data showed the manufacturing sector was already in the tank, and John and Jane Q. Public were sure to run out of stimulus cash to spend soon, right? So, with yield curves of all shapes and sizes signaling a recession was sure to happen, it was an easy bandwagon to jump on.

But a funny thing happened on the way to the economic debacle. It just didn't happen. And as of this writing, there is little evidence to suggest that it will happen any time soon.

Apparently having a job, as well as the ability to change jobs easily if you aren't thrilled with the one you have (and maybe even get paid more in the process) is a good thing. Oh, and seeing the value of your home rise by 30-50% or so since COVID ended didn't hurt any either. To say nothing of that nice little bump most everyone has enjoyed in their 401(K) accounts since the end of 2022.

Yes, I will admit that the recent economic data has come in on the punk side. Examples include the reports on April Jobs, ISM Services, Q1 GDP, UofM Consumer Sentiment, and this week's Retail Sales data. So, while it has been easy to poke fun at the masses calling for recession, any two-handed analyst worth their salt will also admit that the data is not heading in the right direction at the moment.

And yet, both the S&P 500 and NASDAQ indices closed Wednesday at new all-time highs. Yes, that's right, while most everyone is worried about inflation, what the Fed will do next, and the state of the economy, stock market investors seem to be looking the other way. As in, on the bright side.

One reason for the market's seemingly counterintuitive movement is an oldie, but a goodie. Corporate earnings. You see, according to Bloomberg, "North America’s largest companies are on track to post their best quarterly earnings relative to expectations in at least two years." Bloomberg reports that the 459 companies in the S&P 500 that have reported this quarter have posted profits on average that were 8.4% higher than expected. And nearly 80% have beaten profit expectations, which compares favorably to the 76% that beat last quarter. In other words, Corporate America has been beating the pants off of analyst estimates in the early going this year.

How can this be, you ask? Why are companies doing better than expected in an environment where inflation remains elevated and economic data is weakening? In short, because corporations have spent the last year or so preparing for that nasty recession – you know, the one that didn't happen.

Think about that. Yes, Corporate America got the recession call wrong. Very wrong. But because everyone was so sure an economic downturn was inevitable, companies large and small worked hard to cut costs. They stockpiled cash. They shored up their balance sheets. They did more with less. All of which, in turn, has led to higher profits since business conditions turned out to be, well, pretty darned good.

To be sure, the bears are not happy about this development. Our furry friends are quick to point out that stock market investors have gotten lucky here. Lucky that the jobs market has been so strong. Lucky that higher rates haven't killed the housing market (because no one can afford to move on from their sub-3% mortgage). Lucky that the Fed hasn't messed up. Lucky that the consumer had all that stimulus cash to spend. And lucky that all the geopolitical problems haven't wreaked havoc on markets.

But, as I learned a long time ago, Ms. Market's game isn't about "being right." No, it's about "getting it right." In short, nobody cares about what I or anyone else thinks is going to happen next. They only care about their accounts staying positioned on the right side of the prevailing cycle.

Granted, nobody gets the market's moves right all the time. But, if we can strive to get it "mostly right, most of the time," experience tells me things might just turn out okay - even when everybody gets their economic forecast dead wrong.

Thought for the Day:

Keep a green tree in your heart and perhaps a singing bird will come — Chinese Proverb


Disclosures: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.


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