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Are We in the Shortest Recession Ever?

  • Equities
  • Michael Gayed

“I’m not afraid of storms, for I’m learning how to sail my ship.” – Louisa May Alcott

We’re in a recession!  Things are about to get ugly!  Hold on!

No seriously.  Hold on.  For all of the rhetoric around a recession that is either coming or already happening, it’s worth taking a step back, taking a deep breath, and looking at what the market itself is saying.

Prior to October of last year, you would have been hard-pressed to find the media use the R word.  Why? Because US stocks still looked okay.  It was only after the October and December massacres that you started hearing about the potential for the economy to enter into a cyclical recession.  The narrative became quite negative, very quickly.

But remember that narrative tends to follow price.  If equity markets are strong, it must mean we are in an expansion to most participants.  If weak, the opposite.  Price can be wrong, which makes any narrative that follows it wrong too.

Personally, I’m not convinced of the recession case given intermarket trend behaviour.  Two main areas I’m watching here are inflation expectations and the behaviour of Lumber.  When looking at the price ratio of the iShares TIPS Bond ETF (TIP) relative to the iShares 7-10 Year Treasury Bond Fund ETF (IEF), we may be seeing early signs of a bottom and reversal.  TIPS tend to outperform nominal Treasuries when the marketplace thinks inflation is about to pick up.  It also tends to be a leading indicator.  The peak happened mid-September, just before the October collapse last year.

are we in a recession image1

Overcapacity, housing, and credit have historically tended to be the major signs of a recession.  Overcapacity is debatable here, and credit spreads have come back strongly thanks to Papa Powell at the Fed finally paying attention to the market movement.  As far as housing goes, a good tell is the behaviour of Lumber relative to Gold.  Lumber is the ultimate cyclical commodity since the average home has about 14,000 board feat of Lumber.  As noted in the 2015 Founders Award Paper “Lumber: Worth Its Weight in Gold” I co-authored when Lumber outperforms Gold, it tends to be a leading indicator of a better environment for risk-taking.  Looking at recent price action, Lumber turned positive on its rate of change and sits at support.

are we in a recession image2

The point I’m trying to make here is that at least for now, despite skepticism over the rally, other indicators are starting to look more and more potentially positive.  And should the market decide to completely V out of the decline last year, recession arguments will quickly dissipate. All things are subject to change of course.  Our ATAC indicators used in our investment portfolios still point to a more favorable environment.

Let’s just hope the Government Shutdown doesn’t shut burgeoning intermarket momentum down…

Michael A. Gayed, CFA
Portfolio Manager

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