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Key Takeaways
- Confidence has fallen in November after rising for the previous three months
- The S&P CoreLogic Case Shiller fell a further 0.8% in September marking three consecutive months of falls in the national average house price
- It’s the latest in a string of negative economic data, but it’s not all bad news with data such as consumer spending and the unemployment rate holding up surprisingly well.
Right now the economy feels a bit like that looping GIF of the truck that’s about to hit a post, but never does.
We’ve been hearing chatter about a potential recession for what feels like a year now, with multiple CEOs and politicians calling it out. In regards to the executives, their actions have matched their words, with thousands of layoffs being implemented, particularly across the tech sector.
The stock market has also followed suit, with some massive falls in stock prices across the board and very few market sectors able to hold their value.
In terms of the raw economic data, the turnaround has been much slower. The National Bureau of Economic Research has been reluctant to call the start of an official recession, even despite the traditional definition of two consecutive quarters of economic growth being met earlier this year.
The main reasoning for this has been the fact that a reasonable amount of the economic data coming out has been surprisingly positive. The labor market has remained resilient and consumer spending has been steady.
Not to mention a housing market that has continued to see the average price of homes increase, despite a rapid slowdown in transaction numbers.
It appears that these rays of light may be starting to flicker.
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Housing Price Index slows
The latest data from the S&P CoreLogic Case Shiller national home price index has been released, showing that home values in the US fell 0.8% in September over the previous month.
It continues a downward trend that has been in play since the market’s peak in June, with prices now falling for three consecutive months. Considering how much interest rates have increased this year, it’s really not too surprising.
While the overall housing price index is similar to the level it was in March this year, continued rate hikes from the Fed has meant that would-be home buyers are spending a lot more each month on those properties.
So far this year the Fed has implemented four major interest rate increases of 0.75 percentage points. This would be a big hike even just once, but to make this jump four times in a row is a serious policy shift from the decade of record low interest rates.
Of course, this is all in a bid to bring down inflation which has also hit levels we’ve not seen in a generation.
The policy has seen the average 30 year fixed mortgage in the United States reach above 7%, from levels of around 3% in late 2021.
It means an increase in mortgage payments of hundreds of dollars a month, even for those with relatively modest loans. It’s an increased cost that many can’t afford to take, particularly with the cost of living increasing so much across every other sector of the economy.
It means that fewer homeowners are looking to move, with the prospect of a massive increase in their monthly outgoings forcing them to stay in their current mortgage and home.
Consumer confidence hits lowest level since July
After falling consistently each month for the first half of 2022, consumer confidence started to climb back up from its low in June. It increased month on month from an index low of 50 in June up to 59.9 in October, according to the University of Michigan consumer sentiment data. For November, that number has fallen back down to 56.8.
While the index had been increasing steadily up until November, it’s important to keep the figures in context. Consumer confidence is still much lower than the peak over the last few years, with the index breaching 100 back at the beginning of 2020 prior to Covid.
As well as the University of Michigan figures, the Conference Board’s Consumer Confidence Index was also released on Tuesday, and it painted a similar picture.
A recession looks inevitable, but we’ve been hearing that for some time
So economic growth is low, consumer confidence is on its way back down, the stock market has crashed, crypto winter has well and truly arrived and even the housing market is starting to slow. Despite all of this, consumer spending continues to rise, growing by 0.6% in August and September.
This will it/won’t it recession tease is actually exactly what the Fed and chairman Jerome Powell are aiming for.
With inflation at record high levels off the back of the supply chain disruptions of Covid, they’ve been left with no choice but to act decisively to try to bring it down. The problem with raising interest rates to bring down inflation, is that it brings down economic growth with it.
That’s not the end of the world if economic growth is already high, which it usually is when inflation is rising. This time though, things are a bit different. Economic growth has been all over the place, with artificially high numbers last year coming off the low base which was created by the Covid lockdowns.
So with an interest rate policy that is designed to slow economic growth from already low levels, the Fed is actively pushing us towards a recession. In their stated opinion, it’s a price worth paying to get inflation under control.
What they’re hoping to achieve is to do this while causing a ‘soft landing’ of the economy, rather than a major crash. They could probably get inflation down in one fell swoop if they just raised rates to 10%. But, that would cause a major economic meltdown, bankrupt businesses and cause millions of people to lose their jobs.
Not the deal situation.
By spreading the hikes over a longer period of time, it means that the economy can sputter along with some good news and some bad news.
The reality is, whether we enter a formal recession or not doesn’t make too much difference. It’s not like there are businesses waiting to see what the National Bureau of Economic Research announces before they decide whether to give everyone a pay rise or lay them off.
Companies are looking ahead at the projected economic data and making their decisions based on how it might impact their business. The difference in economic growth between +0.1% or -0.2% is unlikely to dramatically change their plans.
What can investors do in the current economy?
With the stock market deep in the red and the prospects for the economy not looking great, what are investors to do? Cash still doesn’t offer much in the way of a return, and with inflation still high it’s real value continues to decrease every year.
Well, one strategy is to look to invest into assets that tend to hold their value during a recession. That might mean your investment holds up better, but it could still stay flat or fall. To really seek outperformance and strong results, you’ve got to get a little more sophisticated.
Luckily, we’ve a great option.
At Q.ai we use the power of AI to implement sophisticated trading strategies usually reserved for high net worth investment banking clients. A perfect example of this is our Large Cap Kit. During periods of low or negative growth, big companies tend to perform better than small and mid-sized ones.
They’re usually more mature businesses with greater diversification in their revenue and less reliance on new customers to generate profits. They also tend to have more cash reserves in the bank, allowing them to get through periods of economic instability.
To take advantage of this, our Large Cap Kit takes a long position in the 1,000 largest companies in the US, while at the same time taking a short position in the next 2,000. It means that investors can profit off the relative change between the two.
Because of the way it’s structured, you can profit even if the overall market is flat or down, as long as large companies hold up better than smaller ones.
It’s like having a personal hedge fund manager, right in your pocket.
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