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This is how everyone becomes a recession expert.
Two weeks ago, most self-proclaimed financial experts were not even talking about “recession” until late 2022/early 2023, a word that has been trending ever since.
In late July and early August, the common consensus among those considered in the know was that 1) NVIDIA (NVDA) stock would rise another 50% after the company’s earnings report on August 28, 2) the S&P 500 would be up 10% by the end of the year, and 3) NVIDIA stock would rise 100% by 2025.
But experts have been scaring everyone for the past week about a possible recession following last Friday’s “bad” jobs report. For example, two major Wall Street banks raised the odds of a recession this week.
These experts voiced their concerns on television, social media, and in research reports, but also to trading desks around the world. The market was thrown into turbulence as crowded AI trades such as AMD (AMD) were dumped without any regard for the underlying fundamentals.
All this talk about a recession seems like nonsense to me. It’s just a pretext for institutions to mobilize retail investors so they can reinvest in high-flying stocks at cheaper prices. We all know that a recession often means negative economic growth, right? Or does it mean a significant slowdown in the economy over a few quarters or even years?
So, does this mean that the U.S. economy could move from a long period of steady expansion, with 2.8% GDP growth in the second quarter, to a slight contraction or worse within the next six months? Could an economy that is creating significant numbers of jobs every month start to create job losses in the near future?
Where is the evidence for this? What was the catalyst? Please don’t contact me on X, formerly Twitter, and tell me it’s because of interest rates, because the economy has been doing well during this period of high interest rates.
Buried in the recession nonsense this week is the ISM services sector report, which includes data on business activity, new orders, employment and supplier deliveries. The index was at 51.4%, up from 48.8% in June.
Any figure above 50% is considered positive for the economy. Most of the companies in the report said their business was stable or gradually expanding.
Initial jobless claims fell 17,000 to a seasonally adjusted 233,000 this week after the market had expected an increase of around 240,000.
Earnings season is also going pretty well, with most well-known public companies comfortably beating revenue and profit expectations and not surprising the public with big shortfalls. Outlook is solid.
The story continues
Is that a recession? You’ve got to be kidding me!
Now, I’m not here to blow smoke and say everything is fine. Many households are struggling to make ends meet because of lingering inflation. This is something I was reminded of when I spoke with P&G (PG) CEO John Mohler a week ago.
I also found the interview that Yahoo Finance’s Brooke DiPalma conducted with Dine Brands (DIN) CEO John Peyton on the NYSE to be an eye-opener in this regard.
“This is a value war, a battle for customer share. … As our target customers cut back on dining out, we need to ensure that when they do choose to dine out, IHOP, Applebee’s or Fuzzy’s are their first choice,” Payton said.
The same is true of DiPalma’s exclusive interview with Molson Coors (TAP) CEO Gavin Hattersley.
“Consumers [are] “They’re making different pack size choices,” said Hattersley, who said the behavior has been going on for “some time” and has been “fairly consistent throughout the second quarter.”
Conversations I had with top leaders last week further illuminated these macro challenges.
Disney (DIS) CFO Hugh Johnston said demand at the company’s theme parks declined in the final weeks of the quarter, and the company expects the slowdown to continue for the next few quarters.
“Consumer behavior is certainly, not necessarily in a recession, shifting to save a little bit of money,” Johnston said. But that didn’t help Disney’s strong quarter for its streaming business. In a recession, people typically cut back on nonessential spending.
When I asked Ralph Lauren (RL) CEO Patrice Louvet if consumer behavior was becoming recessionary (video above), he said, “I think it’s pretty clear that wherever you look, the consumer as a whole is being squeezed by inflationary pressures and the cumulative effect of interest rates. When it comes to our core consumer, we think they’re actually very resilient.”
The company still saw sales growth at its North American stores.
Overall, you don’t get the sense that the economy is already falling off a cliff, and as a result, it’s hard to justify some of the severe declines witnessed in markets this week.
As Cognizant (CTSH) CEO Ravi Kumar told me on the Opening Bid podcast this week, what’s happening now is a gradual economic slowdown that could be short-lived, especially if the Fed cuts interest rates.
Recent labor market trends “seem more consistent with normalization and gradual lower interest rates post-reopening, rather than the current shock and accelerating weakness, but risks remain,” Peter Williams, a strategist at 22V Research, said in a note this week.
I think that’s a fair assessment. What’s not fair is the discussion about this recession hysteria.
Three times each week, I have insightful conversations with some of the biggest names in business and markets on the Opening Bid podcast. Find more episodes on our video hub, available on your favorite streaming service, or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
In the Opening Bid episode below, Judy Shelton, President Trump’s former Federal Reserve nominee, explains why the Fed needs to focus on 0% inflation.
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