Is The Stock Market As Confused As You Are About A Recession?

Last week, Barron’s ran an article entitled “The Stock Market Is Just As Confused About A Potential Recession As You Are?” To wit:

“Investors have long used where we are in the economic cycle to decide which stocks to buy and sell. New research from Nomura’s Joseph Mezrich flips that on its head by showing how investors can use stock performance to help determine where we are in the cycle. Too bad the market is sending mixed messages right now.”

But let’s be clear here; no one wants the party to end. So, despite a struggling stock market over the last year, slowing economic growth, and a collapsing yield curve, there are still plenty of articles suggesting you should just ignore it all and remain invested.

“Economist Ryan Sweet of Moody’s Analytics has a message for his fellow economists who are predicting a recession in the next year: ‘The Fed isn’t going to kill this expansion.'” – Ryan Sweet of Moody’s Analytics

But then he goes on to make an interesting statement:

“Recessions are typically caused by one of two things, he says: Imbalances develop in the economy or financial system (like a bubble in the stock market or in housing), or the Federal Reserve panics and raises interest rates too much in response to unexpected inflation caused by an overheating economy. Neither of those triggers is present.”

Uhm….okay…maybe Ryan just doesn’t get out of the house much but saying there isn’t a bubble in the stock market is like saying Mount Everest is just a mountain.

Also, with respect to his point that the Fed isn’t going to kill this expansion, well that too may also be a bit myopic. As shown, the Fed has been hiking rates to offset the specter of inflation which doesn’t exist to any great degree and have likely gone too far. We suspect this, because the recent reversal in policy is akin to what we have see repeatedly in the past. The Fed tends to stop hiking interest rates when they realize they have caused problems within the economy, like a sudden downward shift in housing, autos, and asset prices.

Sound familiar?

The problem with all of the mainstream claims that there is “no recession in sight” is those claims are based on analysis of unrevised and lagging economic data.

This is an incredibly important point.