The US economy seems to be skating on thin ice, with potential cracks appearing despite the optimism about a soft landing. Rising unemployment rates and high earnings expectations raise concerns about a looming recession. 

While some economists dismiss the importance of rising unemployment, history suggests otherwise. With market volatility expected to stay elevated, caution is advised for investors.

The prevailing belief among investors is that the US economy will achieve a soft landing, where inflation is tamed without causing a major disruption to economic growth. 

This optimism is fueled by encouraging signs like declining inflation, a still-expanding economy, and healthy retail sales. However, there are underlying concerns that suggest a less rosy outlook.

How “soft” will the landing be? The short answer is that any landing good enough to walk away from is relatively soft. The Fed has spent the last few years trying to avoid an outright crash.

This does not mean everything will be smooth. The rising unemployment rate, coupled with high earnings expectations, indicates that the economy may not be as resilient as many believe. 

While the current unemployment rate of 4.2% may seem low historically, its upward trajectory from a cyclical trough of 3.4% signals a potential slowdown.

Furthermore, the recent pullback in the stock market, particularly in the tech sector, highlights the risks of chasing hot stocks and areas like artificial intelligence. This suggests investor expectations may be too high, and a correction could be on the horizon.

The Importance of Unemployment

Some economists downplay the significance of rising unemployment as long as the economy continues to grow. However, history has shown that a rising unemployment rate is a strong indicator of an impending recession. 

It suggests that the economy is operating below its potential, increasing the likelihood of a downturn.

With the recent market pullback and the potential for further volatility, investors are advised to exercise caution. The combination of high valuations, a slowing economy, and looming recession risk creates a challenging environment for investors.

While the US economy has shown resilience, there are signs of potential trouble ahead. The rise in unemployment, coupled with high earnings expectations and a recent market correction, suggests that a soft landing may not be guaranteed. 

Investors need to be aware of these risks and exercise caution in the current market environment. Remember, the economy can be unpredictable, and it’s always better to be prepared for a potential storm.

Key Takeaways:

• Despite optimism about a soft landing, the US economy faces potential challenges.
• Rising unemployment and high earnings expectations are cause for concern.
• The recent market pullback highlights the risks of chasing hot stocks.
• History suggests that a rising unemployment rate is a strong recession indicator.
• Investors are advised to exercise caution in the current market environment. 

By staying informed and understanding the potential risks, we can better navigate the choppy current market and make the informed decisions about our investments that will keep them safe and thriving.

And my advice is simple. There’s always a recession somewhere. If you feel “recessed,” your area of the job market or the larger economy may be feeling more pressure than most. Remember, Big Tech laid off a lot of people in 2021 and 2022.

Those companies went through a full-fledged earnings recession and made the tough calls to restore their margins and get back to work. In the process, they sacrificed a lot of growth programs. So be it.

But the layoffs did not spread. The rest of the economy remains dynamic and in many cases too hot for comfort.

There’s always a relative recession somewhere. But there’s also a boom. Seek the boom.