On July 28, the answer to the recession debate will finally be settled with the release of Q2’s preliminary gross domestic product (GDP) data.<\/p>\n
During Q1, GDP contracted by 1.5%. So, another negative reading would make it official.<\/p>\n
It’s a question that’s recently been plaguing the markets and weighing down on sentiment… maybe even acting as a self-fulfilling prophecy.<\/p>\n
The concept of “talking yourself into a recession” is real.<\/p>\n
It affects behavior all the way from postponing real estate purchases, to cutting back on consumer spending.<\/p>\n
And it’s helped shape the current view on markets. A bearish outlook on markets is now the consensus<\/em> view.<\/p>\n In addition, the Fed looks like it’ll raise interest rates by (at least) another 75-basis points a day before the GDP release.<\/p>\n So, the markets should be preparing to be knocked down to new lows.<\/p>\n Yet, the markets are showing some resiliency. They’re now up 1.4% MTD. It’s nothing to write home about, but it is stabilizing.<\/p>\n And it shouldn’t come as a surprise.<\/p>\n That’s because the Wall Street mantra – history doesn’t repeat itself, but it often rhymes <\/em>– has been taken just a little too far… and used just a little too often.<\/p>\n It’s a saying that gives the green light to assume the future will be like the past.<\/p>\n For example, most analysis I’ve seen look to past recessions, periods of inflation, and Fed tightening cycles to form predictions for today’s markets.<\/p>\n But we’re in uncharted territory.<\/p>\n Never before has the economy been so intertwined on a global scale. The size of central bank balance sheets has never been so big…<\/p>\n We’ve never seen this combined with a global pandemic and 50-year high inflation.<\/p>\n We’ve also never seen recessions in which people can keep<\/em> their jobs and corporations can sit on so much cash to cushion the blow.<\/p>\n In fact, companies will be using their cash hoard for share buybacks to the tune of $300 billion this quarter.<\/p>\n That’s a lot of stock buying.<\/p>\n And the shortage of workers is probably why the U.S. consumer is still<\/em> looking strong.<\/p>\n Last week’s retail sales and consumer sentiment data confirmed this, with both beating expectations.<\/p>\n So, if we’re in a recession, we’re in a really strange one. One where consumers continue to spend, yet the investor mood is low.<\/p>\n For every bearish data point, there seems to be a bullish one as well.<\/p>\n That’s why the market’s been stabilizing at the 3750 support level I wrote about in late June<\/a>.<\/p>\n That level is critical beyond technical reasons. The market’s been bouncing off of it despite<\/em> bad news. And that’s pointing to a situation where a lot of bad news looks like it might be priced in.<\/p>\n We may also be in the early stages of “runaway momentum.” This is when asset prices start rising, while lagging economic data keeps coming back negative.<\/p>\n A perfect example is last Wednesday’s attempt to break that same level following a 9.1% CPI print that exceeded expectations.<\/p>\n That’s bad inflation data, but there’s plenty of counterpoints.<\/p>\n For example, crude oil is down 16% from its peak in June. Natural gas is down 20%. And wheat is down 37% from its recent peak<\/p>\n The next CPI release will probably be lower.<\/p>\n Although bad, these high inflation readings will self-correct through a mechanism known as “positive reflexivity,” or a positive feedback loop.<\/p>\n High inflation is the cure for high inflation. Essentially, when prices become too much to bear, demand drops off. So, prices are brought down to stimulate demand again.<\/p>\n