Watching what’s happened in the financial markets over the past two weeks can be unnerving independent of any financial considerations. The velocity of movement down and up, though mostly down with stocks and record low bond yields has the potential feeling of something bigger. So, is it? Is this the first sign of a recession? The first thing to know is that we never officially know until we’re already in one. A recession is two consecutive quarters of negative GDP growth. We had a solid 2.1% growth to end 2019, we wouldn’t know until July at the soonest. That doesn’t mean it’s not possible to understand what’s happening. Is this a blip on the economic radar or the start of a recession that would end the longest expansion of the US economy in history?
The first thing to know about the financial markets, especially the stock market, is that uncertainty means selling. The coronavirus has without a doubt had a negative impact on the world economy. That necessarily means American multinational companies have and will continue to be negatively impacted by the disruption caused by the virus and that’s without it being a show stopper in the US. But there’s a big difference between short-term disruptions and bigger issues. Which is it? Because we don’t know, that's where the selling came into play. Stocks are now trading at fair value to their trailing-twelve-month earnings. What’s that mean in English? Zero growth. Investors have taken the market down to the presumption of the status quo. That means there’s upside if we grow and downside if we hit a recession. But that’s still about stocks and not the broader economy. So, what should you watch for? Jobs.
The number one, two and three economic indicators I’m looking for right now are jobs. The economy breaks down with 10% government spending, 20% business spending, and 70% consumer spending.
You don’t have to worry about government spending, right? WRONG!! In fact, the coronavirus emergency funds are only leading to an increase in government spending. That wouldn’t be the cause of any recession. As for business spending. It matters for sure. But can we deal with a decline? Yes. We do it all the time provided the reduction in spending doesn’t come in the form of jobs. That’s what this is all about. You and I are 70% of the US economy. We have record employment with record wages and thanks to the Federal Reserve cutting interest rates, record-low borrowing costs. Minus the corona fears, this is an explosive economic story in the making. Any variable rate debt you have just became cheaper. Any borrowing you want to do will come at a lower cost. This includes record-low mortgage rates right now. Word to the wise for anyone looking to buy or refinance. But of course, that only matters if you have a job. That’s what we need to watch. If we don’t have significant layoffs and the virus passes. The economic future will look so bright you’ll need to wear shades. If the layoffs come, the recession likely would too. That’s what you should watch.
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