Negative GDP Print Brings ‘R’ Word Into Focus
Mainstream economists expected a paltry 1% GDP growth for the first quarter, a far cry from the 7% growth realized in the fourth quarter of 2021, yet yesterday’s release showed the U.S. economy contracted 1.4%.¹ The first economic contraction since the Covid19 lockdown considerably raises the probability of a near-term recession, defined as two consecutive quarters of declining GDP. What are the pros and cons of the report? Does it suggest stagflation, a deflationary recession, or a miraculous, ‘Powell-led’, soft landing approaches? What can you do to mitigate the risk of a large loss scenario, should Powell stumble again?
On the plus side of yesterday’s GDP release, consumer spending, which accounts for two-thirds of economic activity, was solid. Business investment was also strong. These are encouraging signs. But later in the day Amazon issued negative guidance for future sales and a disappointing $3.8billion loss for the quarter.² This is concerning, as it may indicate a slowdown in consumer spending is underway, a harbinger for recession. The report also confirms a slowdown in America’s economy is no longer likely, it’s happening; the question now revolves around how bad things will get.
Fed Chairman, Jerome Powell, focused far too long on restoring jobs following the Covid19 recession, which put him behind the more important task of fighting inflation. He is now in a panic to bring his 40 year high inflation under control, and is about to raise rates .5% in a contracting economy. Financial developments are exposing Powell’s errancy at every turn, making a soft landing improbable. The Fed also has a history of going too far in multi-rate hike periods, particularly when fighting inflation. I suspect it will live up to its reputation. A deep deflationary recession is unlikely near-term because supply constraints, exacerbated by the Russia-Ukraine war, de-globalization, and the developments in China and Eastern Europe, all potentially lengthy affairs, are driving worldwide price inflation. Can higher than normal inflation co-exist with a weak, or even periodically contracting, economy for months or years? It not only can, it has, and stagflation is the most probable economic scenario for America over at least the next few years.
I have read several reports from reputable sources in the last week suggesting the market has priced in a 25% probability of recession in the next twelve months. Considering a second quarter contraction, even a mild one, puts the economy officially into recession in June, coupled with Powell’s aggressive inflation posture, suggests the stock market may be grossly misjudging short-term risks.
Consider these moves to reduce risk:
Build portfolio cash to cover anticipated withdrawals for a few years or more, and as ‘dry powder’ to buy great companies after the market discovers its error.
Buy income-producing investments with pricing power.
Own a chaos hedge or two.
Lower your stock exposure a notch, but don’t over-react and sell all your stocks.
Stay diversified.
Take a long-term approach and lower your expectations to reduce unnecessary emotional turbulence.
Think about it, Shaun.
“Rule #1 is don’t lose money. Rule #2 is don’t forget Rule #1.” ~Warren Buffet
“He who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more’.” ~Matthew 25:20
1 Stansberry Digest, Thursday, April 29, 2022 2 USA Today, “Economy contracts first time since 2020 in first quarter as GDP falls 1.4%”, April 28, 2022 https://www.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
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