This really seems like the strangest of all times to be throwing a "no recession" victory party, but that's exactly what the market--and everybody in it--seems to be doing.
If you told me to guess how stocks were doing on a day when jobless claims stayed much higher than expected and industrial production declined, I'd think, probably selling off...those algos know what's coming! But ho, no. The Dow jumped 430 points yesterday as all the major averages added another 1% or so. The S&P is now up 26% from its recent October lows, and up five weeks in a row. The Nasdaq is up eight weeks in a row--its longest winning streak since 2019!
Michael Kantrowitz of Piper Sandler told us yesterday this is all part of the "Fed pivot" rally. The anticipation of what just happened on Wednesday--the Fed finally pausing its rate hikes--has been driving equities higher for months, he said. I asked him about the deteriorating claims data. His answer? It won't matter until it gets bad enough that the market switches from "pivot" exuberance to "downturn" reality.
But the rally (and some of the data) has been so strong that not only have most bearish analysts thrown in the towel and raised their S&P 500 price targets, but even the bearish economists are waving the white flag.
We had Michael Gapen from Bank of America on yesterday to explain why the firm has now chucked its 2023 recession call. Essentially, they think labor supply has rebounded enough--thanks to immigrants and the reentry of working-age women--to bring down wage growth without needing a sharper Fed-induced downturn to do so.
Gapen's firm still thinks we could have two quarters of negative growth in the first half of next year--but that "the depth of the downturn is now more modest than before." They even say we could have a "growth recession"--two quarters of subpar but not even negative growth. Which we appear to be in now, by the way, with just 1.3% growth in the first quarter, and an estimated 1.7% for the second quarter, per Goldman.
But none of this adds up. Even if the near-term outlook has brightened (which I find extremely questionable, given the behavior of jobless claims), the stock market is supposed to anticipate conditions about six months out, which is when Bank of America now says the slowdown will hit. The only way these equity valuations and behaviors make sense is if we are in the early-expansionary phase of the business cycle.
Is that possible? Let's put it this way: it would be unprecedented for a yield curve (10-year/1-year) inversion, rising new and continuing jobless claims, a 35% drop in home sales, declining industrial production, record-low consumer sentiment, and collapsing leading indicators to not be followed by a recession. Perhaps we're somehow going to draw this all out long enough that we end up with a three-year-long "growth recession" instead of an actual, deep downturn. But I would certainly not declare victory on that front until I knew if claims were about to go sharply higher from here.
See you at 1 p.m!
Kelly
P.S. I asked Nassim Taleb yesterday if he thought we could be headed for a "Black Swan"-like event. "This is actually something that resembles 2007, 2008," he said. More here.
