There is a lot of bad news, political, economic and otherwise in the news right now. It probably isn’t a huge surprise when we tell you that the Fed’s recession risk indicator is now greater than it was in November 2007. If you recall, this was the time right in front of the Schemin Brothers disaster immersed in the subprime mortgage scandal. At that point this indicator from the NY Fed, stood at 40 percent.
Now this indicator is pushing 70%!! This indicator is a calculation of the inversion of the yield curve. Short term interest rates are much higher than long term interest rates which is counterintuitive and doesn’t bode well for long-term capital investment in the economy. Historically, that is one of the most accurate indicators of a pending recession. The dangerous, million-dollar question is – is it different this time?
One thing that the financial media is largely missing on the positive side of the asset market ledger is the Inflation Reduction Act. This is a $1.7 trillion stimulus package on top of the more than $5 trillion that Congress dumped on the economy after Covid. The “Inflation Reduction Act” – which is misnamed just for marketing purposes – is hitting government spending numbers right now as the 1st quarter of 2023 the Federal government spent 3% more than 2022. As bad of a long-term strategy for economic stimulus that government spending is, for the near term, it is supporting things. The total government spending as a percentage of the economy in the U.S. is firmly north of 40% and obviously getting much worse – but that is a different discussion.
For now, the question is whether or not the economic slowdown that has obviously started accelerates into a recession. The stock market keeps getting bid up as economic numbers slow down as investors are assuming the Fed is done hiking rates. We will see in the next few months if the effects of the Fed’s aggressive rate hikes are baked into the economy and market environments right now or if there is more pain to come. Stay tuned!
Regards and good investing,