Recession Lesson

Posted on Sunday, June 4th, 2023

My youngest son has been pounding the pavement to find a summer job. I know what you are thinking. Why did he wait so long to look for a job? I read him the riot act. The fact is he had a job. Over Christmas break, he worked for a friend’s father in their warehouse, packing, and shipping orders. They offered him the same position as a summer job. Over the last month or so, there have been layoffs and cutbacks. Then, the dad decided to leave his role at the company—no more summer job for Kevin. I have to give him credit. He really has been pounding the pavement. Every day, he has gone – in person – to any place he can find that is hiring. All the roles he is seeking have been filled. Remember during Covid when everyone needed labor? That is no longer the case. I think that this is a very valuable lesson for him. One is that the economy can go through rough times, and you need to be ready. The other lesson is about grit and determination; he has shown he has it. I’m proud of how he is handling the situation, and maybe Dad will ask some questions next time before he gets on his soap box. 

Analyzing economic indicators is crucial for understanding market trends and potential shifts in the financial landscape. In the realm of economic indicators, unemployment rates play a significant role in gauging economic health. Recent observations by Ian Lyngen at BMO highlight that when the unemployment rate deviates by 0.3% from its previous low within 12 months, it typically leads to a subsequent spike of 1.5 to 3 percentage points higher. Additionally, Sahm’s Rule, named after economist Claudia Sahm, establishes that a 0.5 percentage point increase in the unemployment rate within a 12-month period is a reliable recession signal. In the latest reading this week, the unemployment rate rose from 3.4% to 3.7%, which suggests some economic pain to come. 

Recent market developments reflect concerns regarding the consumer sector. Retailers such as TGT (Target) experienced significant declines, reaching fresh 52-week lows, while companies like Lowe’s, Dollar General, Advanced Auto Parts, and Victoria’s Secret have reported disappointing performances. One thing that we are seeing is a shift in consumer behavior. During recessions, consumers often exhibit a shift in sales penetration from higher-priced items like beef to more affordable alternatives such as poultry and pork. Executives at Costco reported this week that they are seeing that behavior in their customers’ baskets. It seems that the consumer on the lower end is already struggling. On the other hand, Lululemon is doing just fine. There is still a gulf of difference between the high-end and low-end consumers. 

As it has been 18 months since we made a new high in the Dow Jones or S&P 500, we ran an analysis that examined historical market trends where the Dow Jones took considerable time to recover from market lows. The top ten most prolonged periods for the Dow Jones to recover to an all-time high range from 2 to 25 years. While I don’t think it will take another 25 years this current move is getting long in the tooth. More extended time periods usually reflect lower lows with the expectation that we would have seen a move more in line with a 35% drawdown rather than our current 25%. I think we will all be surprised if we have seen the ultimate low on this move.  

1. Great Depression: The Dow Jones took approximately 25 years to reach a new all-time high, from 1929 to 1954. From its peak in September 1929 to its low point in July 1932, the DJIA declined by approximately 89%.
2. Dot-Com Bubble: Following the burst of the dot-com bubble in 2000, it took around 7 years for the Dow Jones to reach a new all-time high, from 2000 to 2007. From its peak in January 2000 to its low point in October 2002, the index declined by approximately 37%.
3. Global Financial Crisis: After the financial crisis in 2008, it took approximately 5 years for the Dow Jones to reach a new all-time high, from 2007 to 2013. From its peak in October 2007 to its low point in March 2009, the index declined by approximately 54%.
4. Early 1970s Recession: It took around 5 years for the Dow Jones to reach a new all-time high, from 1966 to 1972. From its peak in December 1968 to its low point in May 1970, the index declined by approximately 36%.
5. Oil Crisis of the 1970s: Following the oil crisis in the mid-1970s, it took about 5 years for the Dow Jones to reach a new all-time high, from 1973 to 1978. From its peak in January 1973 to its low point in December 1974, the index declined by approximately 45%.
6. Post-9/11: After the September 11 attacks in 2001, it took approximately 4 years for the Dow Jones to reach a new all-time high, from 2001 to 2005. From its peak in August 2000 to its low point in October 2002, the index declined by approximately 27%.
7. Stock Market Crash of 1987: It took around 2 years for the Dow Jones to reach a new all-time high, from 1987 to 1989. From its peak in August 1987 to its low point in December 1987, the index declined by approximately 36%.
8. Early 1980s Recession: Following the recession in the early 1980s, it took about 2 years for the Dow Jones to reach a new all-time high, from 1980 to 1982. From its peak in November 1980 to its low point in August 1982, the index declined by approximately 27%.
9. Bear Market of 1961-1962: It took approximately 2 years for the Dow Jones to reach a new all-time high, from 1961 to 1963. From its peak in December 1961 to its low point in June 1962, the index declined by approximately 27%.
10. Post-Dot-Com Crash: After the dot-com crash in 2000, it took around 2 years for the Dow Jones to reach a new all-time high, from 2002 to 2004. From its peak in March 2000 to its low point in October 2002, the index declined by approximately 32%.

China’s economic numbers have little life, but the government there has chosen to add more stimulus. The Japanese market is doing quite well as authorities there refuse to pull back on the monetary heroin. That is not the case for the next 3-4 months here in the US. Follow the money (monetary policy). The euphoria over the debt ceiling deal may die down as the reality hits that as the Treasury replenishes its TGA account, it will drain cash from the market. The markets had a tailwind as the account was wound down. That and the banking crisis injected cash into the system. That tailwind is now becoming a headwind. 

The market is breaking out of its recent range as we closed above 4200 on the S&P. A break of 4200 is forcing investors to chase the market despite the terrible position of the consumer and the looming recession as FOMO takes over. A move above 4200 sucks people back into the market. The market likes to make a fool out of the most people possible. Everyone has pared back on positions in 2023 as the most telegraphed recession in history was on their minds. Positioning and sentiment are in favor of the bulls. We believe that the narrowness of the rally and the monetary headwinds are going to make the back half of 2023 much more difficult to navigate. 

 

 

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein 

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.