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Good morning and happy Monday! We’re in the Great State of Texas to start the week, visiting in-person with our clients in the South Texas area. The past week produced a combination of familiar and pretty uncommon numbers. Because we address some of them so often (housing, for instance), we’re going to focus this week on some less-than-usual data streams to assess where the economy is headed. We believe as the summer continues, the numbers will begin to surprise, and then panic, Wall Street, and we will be needing to update more than once per week. Check out Jeremy’s (almost) daily economy journal that you can read and subscribe to at “Think Like A Rich Guy”):

• At the Top: We’re on the knife’s edge
• Jobs update: something is broken
• I repeat: the current stock rally is unsustainable
• The service industry is now slowing down noticeably
• What do CEO’s see coming?

At the Top:

We’re on the knife’s edge of recession.

Morgan Stanley maintains an economic cycle indicator that shows the four stages of the economic cycle by different color codes. Their indicator just flashed red for this cycle, indicating that the downturn is confirmed and has begun:

Jobs Update

We got a little more information on the jobs front from the controversial report we told you about a week ago. Officially, US jobs reported another slight uptick in hiring last month (in the official survey – the household survey, as we discussed last week, is wildly off from this official government report):

However, when households themselves were surveyed, they reported a substantially worse situation – about 390,000 job LOSSES in May:

There is a growing gap between the jobs numbers the government provides us, and private surveys of households. This has really never happened in the past, until the early part of 2021, when the government report showed a nice, steady increase in jobs but households told us a very different story. The gap between the two is widening, and I stress again, is unprecedented. One of these two reports is not the truth.

The government’s reports have also been wildly out of alignment with economists’ private estimates, surprising the professionals an astounding 14 straight months in a row with better-than-expected payroll news. Again, unprecedented, and I fear, likely untrue.

We found out where a lot of the government’s jobs number came from. Since 2020, they have reported people starting a side gig as a new job, and about 700,000 of them have left their self-employment prospects behind since the peak in 2021. I’d argue that if it’s considered a job by the government on the way in, it should be counted as a job loss on the way out, but the government doesn’t do that. They keep a count of “new jobs” but these people ceasing to work for themselves a few months later don’t file for unemployment benefits, so they aren’t counted as either an unemployment claim or a job loss. I believe this factor alone is skewing jobs numbers in the official government reports heavily to favor the impression of a stronger-than-reality economy:

Other aspects of employment are also showing signs of a slowdown. The average weekly work week has dropped lower than expected, to 34.3 hours per week. Before layoffs begin, companies first stop hiring new (and temp workers), then they will reduce overall hours, then they might offer early retirement packages, and then they lay off or furlough. Right now, we can see a drop in the average workweek since its peak in early 2021: Areas below the shaded green line are confirmed recessions.

The average hourly wage, while still elevated above historical trends, is also dropping off its peak in 2021:

It also appears to be harder to replace a lost job. This chart shows the number of people who were unemployed last month who find a job this month. A higher red line is a good thing, the lower the red line drops, the harder it is to find a replacement job. We can see that post-Covid, we have seen a dropoff in the number of people who are able to find work a month after being laid off.

Also, the number of people who are permanently severed from employment (rather than being furloughed) is spiking and is already well within the range of the start of previous recessions (gray areas):

What this means to you

Something is “off” about the official government job numbers. It is becoming impossible to explain the number of positive surprises in the numbers we are getting from the Bureau of Labor Statistics, especially when we see so much dropping off in other areas. I would approach the current jobs numbers with a high degree of skepticism and expect to see a massive correction in those numbers come in to surprise the markets at some point this summer.

Stocks are defying reality and it cannot hold up

Once again, the stock market rallied strongly for the week, with many on Wall Street and in the media declaring a new “bull market”. This is rubbish and we will explain why in this section. Here’s how the S&P did compared to the various sectors of the economy. You can see that the riskiest and prone to failure during both recessions and high inflation did the best last week, while the best sectors for safety during a recession: consumer staples, utilities, and energy, underperformed.

This is our first clue that the markets are not operating rationally: why, as the economy worsens, would Wall Street bet ON the investments that will do the worst during a recession?

It’s nearly all in Technology, too: one of the worst-performing sectors of the economy in every recession:

Also, is it a broad rally, supporting all 500 companies in the S&P? Not by a mile. In fact, if we just look at the 5 biggest companies in the S&P 500 index, we can see that the rally has been almost entirely in just those 5 companies. That’s 1% of the S&P index dragging up the entire index. The other 99% of companies are either flat or down still for the year. This is NOT a sustainable (or even realistic) rally. In fact, I’d say, in the case of these 5 companies, it’s another bubble in the making.

Wall Street is also pumping stocks again at a massive pace, pushing the “Fear and Greed Index” to the “Extreme Greed” category. This indicates the markets are overbought, and a downward correction is inevitable.

The same is true for the NASDAQ “Fear and Greed Indicator”. You can see that during periods of extreme greed (or fear), a rapid and inevitable snap-back always follows:

Another measure of fear on Wall Street is the VIX (Volatility Index). This is a measure of how many optimistic vs. pessimistic options traders are out there each day. The higher the VIX, the more fearful the market participants s are becoming. This chart compares the VIX to the projected future earnings of companies in the S&P 500 index. Whenever the VIX drops very low, as it is today, we can actually see when investors are getting lazy about doing their research and may just be buying stocks because everyone else is. We have a definite climb in lazy, complacent investing right now:

The price of our stocks since 2020 has risen far too fast for our country’s economic output to keep up with. A similar event happened in the latter part of the “tech bubble” in the late 1990s. That also resulted in a significant correction.

This “bubble” is actually far worse than 1999’s.

A healthy stock market relies on a healthy economy, and 70+% of our economic output is the result of you and I spending our paychecks each month. So how is the consumer doing right now? Let’s look at a few key areas: credit use and the trend in the prices of the things we buy.

First, consumer credit card usage has climbed back up since Covid. That can have two causes: we are doing really well and feel it’s okay to take on more debt, or we are having trouble making ends meet, and are starting to use credit cards to pick up the slack in our living expenses. Which is it? We’ll see in a minute.

One of the major problems with inflation is that while consumer credit spending might look like it’s trending up for healthy reasons, the effect of massive price hikes on basic items can skew the view quite a bit. The black line is what consumer credit card usage looks like with today’s prices. But if you strip away the price changes of the past few years, you get the blue line. So we are actually buying less with our credit cards; it just costs much more than it did before.

Another major problem with credit cards is that most of them have adjustable interest rates, and as the Federal Reserve has hiked interest rates to help stop inflation, it’s caused credit card interest payments to jump up. This graph shows how much of our income is being take up by interest rate charges.

So while consumers are actually spending a lot on credit cards, they are purchasing less and less, but paying more and more for it. We are definitely slowing down our purchases, however.

Plus, we can now see a definite jump in credit card delinquency rates, across all ages:

And finally, we can see that our personal savings rate is actually declining rapidly since Covid.

Depending on which measure of savings rate we use (pre- or post-Covid), analysts expect the personal savings rate to turn negative sometime between October of this year to October of 2024. Because student loan payments must resume this fall, I strongly believe it will be sooner rather than later.

All of this is giving analysts every likelihood of a recession late this year. How long and how deep this recession will be is still up for much debate, but most analysts agree that the recession will begin in the next 3 or 4 months, at the latest:

What this means for you

The current stock market rally is limited to a few companies, is completely based on herd mentality, is devoid of a logical or economic basis, and CANNOT be sustained into a recession, though it is common for markets to rally right up to the start of one. Our clients are already invested for a recession in a very defensive macroeconomic-directed model, but your 401k or other outside investment accounts may not be. It’s time, in our opinion, to lock in those gains and shift into a defensive strategy until the stock market bottoms out.

Service sector finally shows signs of a slow-down

After holding on above the recessionary target for a few months, the national service sector (basically all companies that don’t manufacture a product) hit the recession trigger last week:

With the reduced output, service managers also reported a slowdown in employment – layoffs are now happening in the service sector just like they have been for six months in the manufacturing sector:

Whatever backlog of orders service companies were working on after Covid has now been totally depleted, indicating a massive slow-down in the service sector is about to begin:

Of note, and a bit of positive news, is that the prices service companies were paying for their own raw materials and supplies continue to drop. This typically has a very slow, but positive effect, on the inflation consumers feel when paying for the final product or service these companies produce:

What this means to you

Both major parts of the economy: the manufacturing and service sectors, are now at or in recession. We remain uninvested in most of the U.S. economy at the moment, focusing our client’s money on sectors of the economy most able to withstand a protracted downturn (in small amounts). We believe this will get much worse before we find a bottom.

What do CEOs think is coming?

U.S. company CEOs are surveyed for their views on the economy from the vantage point of running their companies. Here’s the takeaway:

First, their economic outlook isn’t completely gloomy, but it is fairly pessimistic (and trending lower):

As a result of a deteriorating economy and pessimism setting in, it’s logical to see companies begin to “batten down the hatches” and reduce costs. Hiring is one of the major places we will see companies pull back on, and we are. CEOs report much lower outlook for employment in the coming months:

What this means to you

So much of the economic cycle is due to sentiment making us do the very things we fear will happen. When consumers are fearful, they stop spending. When companies are fearful, they stop hiring. All of these feedback on the general narrative and shape the economy we’re in. Things are worsening, and now sentiment is following. This doesn’t mean the end of the world; just that we will have a period of months to a year or two where economic output is lower than we’re used to, and sadly, this means that some companies may not survive and that some jobs are lost. Our job as your financial planner and investment manager is to get your household budget ready for these rough times and to make sure your investment portfolio rides through it with minimal impact. We’re hard at work doing exactly that while we watch the economic numbers come in daily.

Bottom Line:

We remain convinced that a recession is imminent, even as the market fights back hard against it. Do not let the current market rally fool you – there is no sustainable way to grow profits (and therefore a supportable stock price) in an economy that is rapidly losing steam. Corporate profit reports are backward-looking and economic projections are forward-looking. Do not be lulled into complacency just because the stock market allows itself to.

We’ve been alerting our clients for nearly two years now that inflation was going to cause significant problems and our central banks would have to take progressively stronger actions to combat it. That appears to be a correct call.

No one knows exactly when a recession will be declared, but we firmly believe most of the larger economies of the world are right at the door of one now. Recessions can take years to recover from, which is why we believe it is vitally important to get your family and business finances ready to weather through such a storm.

We predicted the beginning of a turn in the current market rally last week, and we reiterate that sentiment now. There will always be market movement that runs counter to the economic data because markets are much more short-term focused, and let’s face it: until fear takes hold, greed is the prevailing emotional state of most market participants. We do believe, however, that the recent rally has fully run its course, and there will soon be a strong shift from stocks into safer investment options such as corporate and government bonds. With interest rates this high, getting a 5% or better yield, risk-free is becoming a more and more attractive option for investors concerned about the coming economic uncertainty. Once there is consensus that either the economy is earnestly deteriorating, or the Fed announces the end of rate hikes, the move from stocks to bonds will accelerate.

Whether you are our client or not, you need to consider the broader economy (and much less so the daily market fluctuations) when making investment decisions. The economy is telling us clearly what is coming, and you need to have your investment accounts prepared before that happens.

Just this past month, I published an ebook to help you get your finances ready for the recession directly ahead. It’s yours totally free. Just click on the book image to access and download it.

Use these economic reports, and those of others working in this space, to prepare. You can not only avoid much of the pain that is coming, but you might actually profit from it, if your investments are properly positioned, and you’ve done what you can to shore up your business’ and family’s financial situation. If you need help with this, nVest Advisors has amazingly affordable personal financial planning and fiduciary investment management services to help you.

This is what we do for a living, and we’re very happy to partner with you on that endeavor.

Reach out to us for a totally free financial and portfolio checkup today if you’re concerned about where your finances sit for the coming few years, particularly if you are at or approaching retirement age. We’re delighted to offer you our thoughts. You can schedule that time with us below:

Watching This Week:

• Jobs Report
• Service Sector Update
• Commodities

The views and opinions expressed in this economic outlook are for information purposes only and are not intended to be financial advice. nVest Advisors, LLC does not provide specific investment or financial planning advice to a client without an executed client service agreement. nVest Advisors, LLC does not trade directly in commodities or cryptocurrencies. Economic data changes rapidly; no warranty is expressed or implied about the reliability of this data once published. Although the information provided here is derived from authoritative sources, we cannot guarantee the accuracy of this information. Please see our general disclosure page for additional details.