My take: Much to do about nothing

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September 2/9, 2019: Volume 35, Issue 6

By Steven Feldman

 

As a member of the media, I have always tried to publish information as accurately and objectively as possible. I have never been concerned about ratings points or “sensationalist” journalism, which seems to be the norm these days. Whether it’s the political, economic or meteorological arena, it’s all about capturing eyes and ears en masse.

I was reminded of this last month when just about every media outlet had this country on the brink of recession when the two- and 10-year treasury yield curves inverted. That is never good for business, including ours.

First, some historical facts about recessions:

1. There have been 11 since WWII, occurring, on average, one year in seven, and, on average, they last 11 months.

2. An inverted yield curve refers to when the yield on the two-year treasury is higher than on the 10-year treasury. The economy has experienced a recession, on average, 17 months after an inversion occurs.

3. The inversion that occurred Aug. 14, which resulted in a one-day drop of 800 points on the Dow Jones average, lasted about five minutes while the two- year yielded 1.628% and the 10-year yielded 1.619%—a difference of 1 basis point (1/100 of 1%).

4. There hasn’t been a recession since 2008-09, and the inversion in the yield curve said to have predicted that recession occurred about two years prior.

In sum, the financial media catastrophized for close to a week about this. Given that recessions happen about every seven years and we haven’t had one in almost 10, we don’t need any particular media prognostications to know we should expect one. Of course, we still can’t time it, nor does it matter.

What has been the default response of investors to this “news?” According to the Investment Company Institute, investors dumped $18 billion into money market funds for the week ended Aug. 16, pushing total money market assets to a near 10-year record of about $3.4 trillion.

So, here we sit, living through the most powerful bull market in a generation, yet investors are still expressing fear. The most recent American Association of Individual Investors (AAII) sentiment survey shows the percentage of investors expecting stocks to rise over the next six months is 23% (near record lows) while those expecting a market fall stood at 45%.

Profit-seeking companies—unlike Western governments—will react rationally to conditions as they find them; the best will continue to grow and prosper. Economic life will go on.

Here is some real good news that you won’t get from the financial media:

1. In the first quarter of this year, household net worth soared 4.5%, its biggest quarterly rise in 14 years, reaching $108 trillion (up from its 2007 prerecession peak of $68 trillion).

2. According to JP Morgan, household debt payments as a percent of disposable income dropped to 9.9%, a 40- year low.

3. Total wages rose 4.6% in the 12 months ending in May.

4. Unemployment stands at 3.7%. In May, the median duration of unemployment fell to 9.1 weeks, while the percentage of unemployed who voluntarily quit rose to 13.5%. These two metrics are indicative of a tightening labor market rather than an economy that is stalling out.

5. Target and Lowe’s, two large consumer-driven companies, reported second-quarter earnings up 20% and 10%, respectively. This serves as confirmation that the consumer, and our economy, is alive and kicking.

Flooring retailers have reported business to be inconsistent this year. But not many have told me business is down. That’s reality. Sure, a recession will come. In fact, ITR Economics, which has a 95% accuracy rate, have long predicted a slight recession during the second half of 2019 or first half of 2020. But generally speaking, the next nine or 10 years will be fine. And if that sounds too boring for the national media, well, it can find something else to sensationalize.

 

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