Our studies of economic and stock market history are meant to provide perspective, not an investment roadmap. But occasionally a current trend will resemble the past so closely it’s eerie.
Take the current inflation cycle. If (as we believe) June’s CPI inflation rate of 9.1% represents the peak for this business cycle, then many of its characteristics have lined up almost perfectly with the “average” of past inflationary episodes.
When the economy falls into recession, labor market measures will be among the last to tell us. We can’t resist watching them anyway, for two reasons. First, we know that the Fed’s self-proclaimed data dependency is unduly reliant on lagging data points, like the monthly employment report. We want to see what the policymakers are seeing, even if that sometimes means using the same, fogged-up rearview mirror.
The bear was a mere cub back in March when we examined the historical record of buying S&P 500 dips in the -10% to -12% range. “Blindly” buying them turned out to have mediocre returns, but we illustrated that the positions of various business-cycle indicators could help one determine whether or not catching the proverbial “falling knife” was warranted.
We view the coronavirus pandemic as the final straw that tipped an already vulnerable U.S. economy into recession, rather than the watershed event that will change the way we view growth, profitability, and even the nature of work itself. But even economic “optimists” like us need to recognize that the recovery back to last cycle’s earnings peak will be a long and grinding one. There’s a good chance that the four-quarter trailing S&P 500 GAAP Earnings Per Share cycle peak of $139.47 will not be exceeded until 2023 or 2024 (Chart 1).
Over a 12-month horizon, we now believe a U.S. recession is very likely, but aren’t confident enough to make the call when the forecast window is cut in half. Second-half stock returns could be decent if the business-cycle peak is still a year away. Then again, there’s peril in waiting for “too much” confirmation of recession.
Jim Floyd and Steve Leuthold believe that U.S. consumer price inflation has peaked and is headed for the +3% level by mid-2009. With current headline inflation running at +5.4%, that implies there is plenty of disinflation in the pipeline.
Optimists have continuously cited low unemployment and the ever resilient U.S. consumer as two “pillars of strength” that will help keep the economy afloat. It has become considerably more difficult to make this case in recent months, as jobs and spending data have weakened to levels associated with recessions.
What little discussion of a possible U.S. recession there had been in the first half of the year has dried up with an apparent pick up in the economy. “Inside The Stock Market” this month presents a 2008 Recession Watch, identifying some indicators which may prove useful in assessing the possibly of a coming recession.