Inflation, Recession, Rebound?

Lou Basenese

Thursday, June 9, 2022

When you’re sidelined with Covid-19 — like I have been for the better part of a week — you get a lot of downtime to read. Mustering up the energy for anything else just doesn’t happen.

So what have I learned that’s relevant to all of us here?

Put simply, the infatuation with runaway inflation, which I’ve been writing about (see here) has quickly progressed into downright fear over the dreaded “R” word: “Recession.”

Or as Bloomberg noted, “That much-predicted future downturn has become a common refrain in financial and media circles.”

Indeed!

But before you join the freak-out party, here are a few important facts to consider…

Progress is Key

The progression from obsessing over inflation to obsessing over a recession actually represents healthy progress. Much like progressing through the five stages of grief. The faster we advance, the faster we get to the other side (i.e., rising stock prices).

In this case, while prices (particularly for gasoline) haven’t peaked yet, inflation expectations certainly have, which I shared last week (see here). Prices are next.

If you have any doubt, consider what we’ve learned in recent days from major retailers Target Corporation (TGT) and Walmart Inc. (WMT). They built up way too much inventory, and the only cure for this glut is to — you guessed it — slash prices.

Mark my words, retail won’t be the only sector in coming months to confess it went from pandemic-caused shortages to gluts, which now require price cuts. So inflation relief is imminent.

Add in recent news about companies freezing hiring and/or cutting back headcounts — by as much as 10% in the case of Tesla, Inc. (TSLA) — and consumer sentiment sinking to a decade low, and it’s a given: consumer behaviors are bound to follow, leading to less buying, and in turn, lower prices.

Last but not least, as Nobel laureate economist Robert Shiller notes, recessions tend to be “self-fulfilling prophecies.”

The more that companies, investors, and consumers talk and worry about one, the more they change their behaviors to actually bring one about.

Or as Shiller put it, “The fear can lead to the actuality.”

Shocker: I believe we could actually be in the middle of a recession right now. All it takes is two consecutive quarters of contraction.

And guess what? In Q1, the annual U.S. GDP growth rate unexpectedly shrank 1.5% after posting a 6.9% increase in the previous quarter.

That’s a massive reversal. So don’t be surprised if we see the downtrend continue when Q2 GDP numbers are released at the end of this month.

Hint: No one’s predicting it, but that doesn’t mean it can’t happen.

Debbie Downer?

How could any of this be a positive?! It’s simple…

First of all, moving from inflation to recession denotes progress.

Now we’ve reached the phase of figuring out not if we’ll have a recession, but how long it will last. For perspective, the average one lasts 10 months, excluding the Great Depression. And the shortest one lasted two months, which occurred at the start of the pandemic.

The next thing to follow once a recession starts is a stock market rebound.

Read that previous line carefully. While many investors believe we need to get to the end of a recession before stock prices rebound, they’re wrong.

Remember, stock markets remain forward-looking and historically biased towards optimism. So at the first hints of recovery, the rebound begins.

Tomorrow, I’m going to provide more data to back all this up — including the possibility that the worst stock declines are already behind us, and what the likelihood is for stocks to rally during the current or coming recession. (Yes, it’s happened multiple times before.)

Again, all based on history, not emotion. So stay tuned!

Ahead of the tape,
Lou Basenese
Lou Basenese

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