Wall Street had a little trouble deciding whether to cheer signs of continued strength in the job market or run for cover . . . but one nuance in the numbers was loud and as clear as it gets.
If you think a recession means a return to the mass layoffs and spiking unemployment rates we saw back in 2008, there’s zero recession here. None.
And in the absence of an immediate recession, bears now need to come up with a new horror story scary enough to separate investors from their stocks. The old one just isn’t working.
Maybe it’s relevant that when Goldilocks found the cottage in the fairy tale, it belonged to bears. In their economy, some of the food was too hot for Goldilocks to handle. Some was too cold.
But in the middle, Goldilocks got what she wanted, enriching herself while literally eating the bears’ lunch.
A Hot Meal
The problem with the bear scenario is that the economy is running on the hot end of comfortable . . . hot enough to generate a lot of inflation, but heat in itself is not bad enough to make the bears happy.
Technically heat is a sign of a vibrant economy. People are working. Wealth is created. Main Street prospers and Wall Street shares that prosperity.
Stagflation, on the other hand, is the worst scenario because the hot parts are too hot and the cold parts are too cold. Goldilocks has to eat the worst of both bowls, with prices still spiraling out of control while American households no longer have money coming in to help us all cope.
The hot part, pricing, is too hot. That’s the inflation story. But for the bears to win, we need stagnation as well . . . and that’s usually a factor of a deteriorating job market, which has yet to materialize.
Until it does, the hot bowl is hot. The cold bowl of recession isn’t even on the table.
According to the numbers, unemployment remains where it was in 2019-20, right before the pandemic lockdowns knocked 22 million Americans out of work in a handful of weeks. Life felt pretty good back then, didn’t it?
And before 2019, you need to go back to the late 1960s to find similar sustained low unemployment rates. In hindsight, that era wasn’t the end of the world either. It might even have felt a little like a golden age.
It took a few years for inflation and tighter monetary policy to trigger a recession. Before that moment, it was one of the best times in history to be an American worker.
Admittedly, it didn’t feel great at the time to live in an economy that was already starting to burn a little too hot for long-term comfort. Goldilocks felt the burn.
But wages largely tracked inflation as long as paychecks kept coming, so it wasn’t too miserable . . . until the layoffs started.
The Fed Runs The Table
And 2008-style layoffs absolutely terrify the people running the Fed today. They aren’t going back there.
They’ll stomach a little less heat in the job market. Arguably, they’d even welcome unemployment edging up a tenth of a percentage point or two.
More people looking for work and not finding it mean more people who will settle for what they’re offered. People who settle won’t be quite so lavish with their spending.
Real budgets will force real choices, taking demand pressure out of the system at a moment when supply chains remain under stress. That’s what the Fed wants.
But at the first sign of anything worse . . . any substantial reversal of job creation . . . the fight against inflation will pause. Never forget that the Fed now serves two masters. One is price stability. The other is full employment.
And even before the pandemic, we saw that if it’s a question between feeding inflation and forcing layoffs, the Fed will turn a blind eye to prices in order to keep Americans working.
Goldilocks’ table is rigged. A little heat is tolerable, even desirable. The Fed won’t take interest rates to the point where the job market freezes over.
What the Fed is not interested in is GDP. A technical recession can come and go . . . I’m not convinced such a thing can happen without a lot of layoffs forcing the Fed to pause, but we’ve all lived through improbable events and investors have managed to find a way to make money in the meantime.
Who’s Afraid Of The Market?
Evidently the world isn’t ending. It’s just an economic cycle, like the seasons: time to plant, time to harvest. And I’ve done the math, like a lot of investors.
This is time to plant for a future harvest. Every recession is good to the companies that manage to go public during a slowdown.
If you think a slowdown is already underway, this is the time to buy the newest IPOs.
The most recent recession was the COVID shock of February through April 2020. Sudden, severe, but thankfully short . . . too short for Wall Street to pull the plug on IPOs that were lined up to go public in the weeks before the pandemic went global.
And yes, a lot of those fragile little IPOs never recovered. Two years out, they’re down 50-90%. Ouch! But that’s just how early-stage investing always works.
Here’s proof: for every IMRA or QNGY that rang the market bell during the COVID catastrophe and went nowhere but down, there’s a DCBO . . an ARNC . . a BEAM . . . a BSFC.
If you bought IPOs in the COVID recession, you boosted your return 10 percentage points above what the “safe, mature, defensive” S&P 500 index funds provided. Simple and sweet.
That was true in the 2008 recession. And the dot-com crash. And the 1991 recession, which nobody remembers. And the 1981 recession, which again, nobody remembers.
When the slowdown comes, a lot of small companies will implode. But so will big ones, and the strongest small companies left behind will prosper in their absence.
Those are the kinds of stocks we love for the long haul. I’m excited.