What was the most important moment in Jerome Powell’s post-Fed meeting comments this week? I believe it was when a reporter asked about the Fed staff removing recession from their forecast. Powell responded, “It is hard to see a recession when one looks at the data.”
Last quarter began with the so-called blue-chip consensus of economists predicting 0 percent growth; actual growth was 4.9 percent. That announcement didn’t seem to matter, and the narrative on Wall Street remained that we must go into recession because of interest rate hikes. Earnings have been much better than expected with 78 percent of companies outperforming expectations. That didn’t faze the narrative, however, and only 38 percent of companies have seen their stocks rise on earnings. The broken records that have been wrong for this whole cycle kept insisting that gloom and doom are right around the corner.
Then Jerome Powell said, “It is hard to see a recession when one looks at the data.” Maybe, just maybe, reality will trump narrative just this once. If so, the market should rally for a while. I know most people either do not pay attention at all or if they do, it is just to the S&P500, which most in the media refer to as the stock market. That index, which is heavily skewed by a handful of extremely large technology companies, is down approximately 8 percent from the beginning of 2022. However, global markets as a whole are still down almost 20 percent. We have become accustomed to the market dropping rapidly and then bouncing back rapidly, but this bear market dropped, then had several false starts on rallies, but has stayed down.
What is frustrating about this is that company earnings and the economy as a whole have not stayed down. Stocks are supposed to forecast roughly six months in advance, yet stocks bottomed after the two quarters in a row of negative GDP growth in 2022, which was mysteriously not declared a recession. Since then, the real world has been slowly recovering. Company earnings as a whole have re-entered growth – slow growth, but growth. The GDP growth numbers have been between 2 and 5 percent every quarter since, yet the market continues to stay depressed.
While most pundits focus only on the S&P500 whose value is skewed by a few very large companies, most stocks are priced for a recession while we are actually growing at 4.9 percent. Banks are priced as if we are in a crisis, and we are not. Energy companies are priced as if oil were at $40, and it is above $80. Utilities have acted as if no one in America is paying their bills even while we have less than 4 percent unemployment. I could go on and on.
Perhaps this is finally the time where the market wakes up and realizes that it has gone too far to the downside and stayed down too long. We had the recession already; we are not going into a new one. We will keep our fingers crossed. If the rally fails once more, then we just have to stay patient. I’m sure that some pundits who have seemingly risked their careers on the persistently wrong calls for a recession will stay at it. However, some may have actually listened. Recession is hard to see for anyone who is actually looking at the data.
Chuck Osborne, CFA