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Is A Recession Coming

Is A Recession Coming – Week in Review

Is A Recession Coming

Investors are starting to ask if a recession is coming? The mainstream media and financial press have endless stories about high gas and oil prices, inflation, supply chain disruptions, rising labor costs, etc.

There are signs of a recession, but there are signs of the economy humming along, and consumers and businesses continue to spend.

Is A Recession Coming
Is A Recession Coming?

Financial Press is Negative

Despite near record-low unemployment and rising wages, the financial press and mainstream media have been beating a steady drumbeat of negative economic news. Naturally, the main concern is inflation. Below are some recent headlines that show the press’ negativity.

The bad vibes economy – Vox

The World Bank says most countries are headed for a recession, and warns of a possible return to 1970s ‘stagflation’ – FORTUNE

Strong inflation, anxious consumers add up to more worries that recession has already arrived – CNBC

Elon Musk Sees a Recession Coming. Here Are 3 Ways to Protect Yourself – Hackernoon

A recession in America by 2024 looks likely – The Economist

Corporate America Turns Up Volume on Warnings About Economy – Bloomberg

Recession is coming, but it’s a necessary evil, PNC CEO Bill Demchak says – Pittsburgh Post-Gazette

With Risks of a Recession Rising, Take These Steps Before One Hits – CNET

The Federal Reserve’s ‘Most Anticipated’ Recession In History May Be Coming – Investor’s Business Daily

In any case, you get the point that a recession may not be imminent, but the financial press and major institutions anticipate that one is coming.

Economic Indicators

The main reason for the negative press is economic indicators are decelerating and suggesting an economic slowdown even if a recession is not coming immediately.

  • New home sales have fallen ~17% and are at their lowest since April 2020. Although troubling, the current rate is near the average between April 2017 and April 2020.
New Home Sales
Source: US Census Bureau
  • Mortgage applications have fallen to the lowest level in 22 years as 30-year mortgage rates increased by over 5%. Years of low-interest rates have left many homeowners with rates below the current 30-year mortgage rate.
  • Homebuilder sentiment is declining.
  • Class 8 truck orders are running well below 2021 due to supply chain issues and a lack of semiconductors.
  • Retail sales are slowing as consumers focus on groceries, gasoline, and necessities. As a result, major retailers like Target (TGT) and Walmart (WMT) are slashing prices to clear inventory. Furthermore, they are reporting higher costs and lower margins. Even Amazon (AMZN) is reporting lower Q1 2022 online retail sales.
  • Corporate credit spreads are widening, usually correlated with slowing growth and economies.
Corporate Credit Spreads
Source: St. Louis Fed
  • Unemployment claims are inching up but are still at the lowest levels in years.
  • The PMI Index is weakening, a sign of a slowing economy.
  • Stock markets are in a correction.

Recession Indicators

The skyscraper index is a popular and odd one linking the construction of the world’s tallest building to a recession. The Chrysler Building and the Empire State Building were constructed during the start of the Great Depression. The current world’s tallest building, the Burj Khalifa in Dubai, was built during the Great Recession. The world’s second-tallest building, Merdeka 118, is nearing completion in Kuala Lumpur, Malaysia. Many other tall buildings were recently completed or are in the middle of construction, including the Steinway Tower in NYC and several in Asia and the Middle East.

Other urban legends about recessions indicators include the hemline, men’s underwear, and lipstick indices.

Next, the Rule of 10 is flashing a recession. The Rule of 10 is a theory that the US economy contracts when gas prices plus mortgage interest rates are 10+. Gas prices are now averaging $5.00 per gallon in the US, and the 30-year mortgage rate is 5.23%.

On the other hand, the most accurate predictor of recessions is currently not signaling a recession. The yield curve is presently not inverted. As seen in the charts further below, the 3-month and 2-year Treasury rates are not less than the 10-year rate. That said, the rates were inverted briefly in March 2022 but rapidly bounced back. Inversion is a leading indicator suggesting a recession. In general, rate curve inversions precede a recession by seven to 24 months.

Final Thoughts on Is a Recession Coming

Whether a recession is coming or not is tough for an investor to ascertain. The economic and recession indicators seem to point to a slowdown even if a recession does not arrive immediately. The war in the Ukraine, widespread shutdowns in China and persistent inflation are not helping. It is important to note that the last three recessions were triggered by the dot-com crash, the sub-prime mortgage crisis, and COVID-19, not only by high inflation.

However, the US and global economy is absorbing much of the recent economic bad news and is still growing. Consumers are directly affected by high gas and food prices, but they do not seem to be driving or buying less. Americans saved nearly $2.7 trillion during the pandemic through the end of 2021, and they are spending it on travel, commuting, and eating out at restaurants. In addition, a robust stock market and record house prices through 2021 added to wealth and consumption. If consumers continue to spend, a recession may be short-lived, but if they pull back, it may be longer.

What is an investor to do? Long-term investors have been through multiple recessions, corrections, and bear markets. They know market volatility and economic contractions happen. If a recession is coming, most stay the course. That said, interest rates are likely going higher, and market volatility is probably with us for a while.


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The Stock of the Week

Today we highlight Intercontinental Exchange (ICE), an operator of exchanges. The firm operates through three segments: Exchanges, Fixed Income and Data Services, and Mortgage Technology. ICE is best known for owning the New York Stock Exchange (NYSE). Additionally, the firm bought Ellie Mae and other mortgage tech companies, becoming a major player in mortgage origination and closing. 

According to Stock Rover*, the stock price was down nearly (-28.3%) year-to-date (YTD). ICE is a Dividend Challenger with nine years of increases after initiating a dividend in 2013. The forward dividend yield is about 1.55%, the highest since the pandemic. The stock price is below the 50-day and 200-day exponential moving average (EMA). The forward P/E ratio is about 17.9X, below the range in the past 5-years and 10-years.

ICE Chart and Valuation
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of May 2022. As a result, the number of companies on the list has risen to 557. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in May.

The new additions were CVR Partners, LP (UAN), Oasis Petroleum (OAS), Eagle Bulk Shipping (EGLE), United Guardian (UG), Golden Ocean (GOGL), and Ellington Residential Mortgage REIT (EARN).

Market Indices

06/11/22

Dow Jones Industrial Averages (DJIA): 31,392 (-4.58%)

NASDAQ: 11,340 (-5.60%)

S&P 500: 3,901 (-5.06%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 19.71X, and the Schiller P/E Ratio is about 30.50X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively. 

The market is still overvalued despite the recent market correction and rebound. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was up about 3.0 points to 27.75. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

CBOE VIX
Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The US Energy Information Administration reported that US commercial crude oil stockpiles increased by 2.0M barrelsto 416.8M (15% below the five-year average) on June 3rd.   Crude oil refinery inputs averaged 16.4M barrels per day, an increase of 355K per day compared to the previous week’s average. Gasoline inventories decreased by 0.8M barrels (10% below the five-year average), and distillate inventories increased by 2.6M barrels (23% below the five-year average) to 218.2M barrels. Refineries operated at 94.2% of their operable capacity as gasoline production increased, averaging 10.0M barrels per day. Crude oil imports came in at 6.6M barrels per day, an increase of 299K per day compared to the previous week.

The Labor Department reported an increase in initial jobless claims for the week ending June 4th. The seasonally adjusted initial claims were reported at 229,000, an increase of 27,000 from the previous week’s upwardly revised level. The last week’s initial claims value was revised from 200,000 to 202,000. The four-week moving average, which smooths out volatility was 215,000, an increase of 8,000 from the previous week’s revised average.

The US Bureau of Labor Statistics reported the consumer price index rose 1.0% in May and followed a 0.3% increase in April. Over the last 12 months, the all items index is up 8.6% before seasonal adjustment, the fastest rate since 1981. Increases in the indexes for shelter (+0.6%), gasoline (+4.1%), and food (+1.2%) were the most significant contributors to the seasonally adjusted all items increase. In addition, indexes for airfares (+12.6%), used cars and trucks (+1.8%), and dairy products (+2.9%) all saw significant increases. After declining in April, the energy index rose 3.9%.

Thanks for reading Is a Recession Coming – Week in Review!


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