Markets are awash with talk of recession.
All hopes now are pinned on the idea that the Federal Reserve, the US central bank, might be able to give us a “soft landing”.
The latest US jobs data has inspired this talk – but I’m not sure any of it has much value to investors.
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Why the US consumer matters
The US economy is still the world’s most important economy. Like the UK economy, it is driven primarily by consumption – that’s what comprises the lion’s share of GDP. In turn, that makes the US consumer one of the most powerful economic forces on the planet.
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What dictates the health of the US consumer? More than anything, the labour market. Consumer confidence has its ups and downs. What really matters though, is how much money consumers have in their pockets.
The rising cost of living nibbles away at that, of course. But the real driver is whether people have jobs or not, and whether they feel comfortable that they can hang onto them.
So if you want to get a snapshot of the strength of the world��s most important economy, then the US monthly payrolls data is about as good as you can get.
That’s why it’s such an important data release. The latest report came out on Friday – and markets weren’t overjoyed by what they saw.
In May, employers added another 390,000 staff to payrolls. That was more than expected and there were gains across the board. Meanwhile, wage growth came in at an annual rate of 5.2%. That was a bit below the 5.5% seen in the previous month, but still pretty solid.
The unemployment rate is now at 3.6%, compared to 3.5% in February 2020. In other words, it’s almost back to the pre-pandemic lows.
Why were markets not so keen on such strong growth? Because all the talk right now is of recession. The one good thing about a recession (as far as markets are concerned) is that it would stop the Federal Reserve from raising interest rates much further.
Given how gloomy some voices are, it seems that quite a few investors had positioned themselves for a disappointment on the jobs front; they didn’t get it. And in fact, what they got was a report that can only strengthen the Fed’s resolve to keep raising rates.
As we all probably know by now, markets love stories, and they are constantly trying to update those stories to take account of new data. As a result, the new “story” grabbing the headlines is the idea of the “soft landing”. Can the Fed ever-so-cleverly cool the economy off without driving it into recession? There are now lots of bits of research flying about trying to look at times when it’s happened in the past and gauging the odds of it happening today.
But I’m not sure it’s the right thing to worry about as an investor right now. In a way, recession is a red herring.
Investors are still in “buy the dip” mode
Think about it like this: purely from an investment point of view, the market wouldn’t necessarily mind the idea of a recession because investors believe that would make the Fed more wary of raising interest rates. They also assume that a recession would result in a decline in inflation.
But neither of those things is a foregone conclusion. The problem is that we’ve been in an environment where the biggest macro-economic enemy has been deflation for so long, that we’ve forgotten any other world is possible.
Investors are still shrugging to shake off that mindset. At some level, many are hoping that we’ll return to the same world we were in between 2009 and 2016; a world where economic growth was weak, and so interest rates just kept going down and asset prices just kept going up.
Here’s a good example of this thinking in action, if you need it. Cathie Wood and her ARK Innovation exchange-traded fund (ETF) – which invests in all the most speculative stuff in the market – have had a very painful year and a bit. The ETF peaked in February last year and the share price is down by 70% or so since then.
What’s impressive is that Cathie’s supporters have not abandoned her. In fact, over a billion dollars poured into the fund during the first four months of the year. That doesn’t scream “capitulation” to me; instead it suggests that “buy the dip” is far from dead.
What’s going on here still feels more like a reshuffling to me than the sort of recession that we’ve been used to.
Virtual world assets and those dependent on far-flung hopes and dreams are being brought back to reality hard. That’s responsible for a lot of the recession talk – it’s because the bubbliest assets have also been the noisiest. We’re at risk of mistaking panic-stricken memos from over-extended venture capitalists as being representative of the economy as a whole.
Meanwhile the real-world assets that we’ve neglected (or shunned, in the case of fossil fuels) are making our dependence on them clear once again.
So rather than spending lots of time worrying about when it’ll be time to buy back into yesterday’s bubble assets, investors should be spending more time thinking about positioning their portfolios for a very different future indeed.
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