You all know I'm trying to keep an open mind and highlight the positives right now about the economy. But it's hard.
The slowdown sequence to me still looks in place. The labor market is pretty much always the last to give out. So far this time around, nothing is different. Manufacturing and housing turned down first, as per usual. Other leading indicators have since followed. Loan demand has dropped, lending standards have tightened, the consumer is looking a bit wobbly.
Goldman economists combed through basically all of the earnings so far this season and wrote up their key takeaways over the weekend. Ironically, one of their snippets of "good" news to me just confirms the slowdown story: "References to labor shortages in Russell 3000 earnings calls fell to the lowest level of the pandemic recovery," they said, with less than 5% of companies citing them, down from a peak of more than 16% in late 2021.
Well, yes, that's great for companies who need a break from the chronic shortages and wage pressures that are compressing profit margins. But I can't see how it's good news from a cyclical point of view, because it confirms the labor market is cooling. "Several companies viewed the staffing situation as back to normal or nearly normal, including Starbucks and Hilton," they noted.
Against this backdrop, it's especially odd to see how strong the stock market has been since January 1 (the Nasdaq is up almost 13%) when (a) rates are nearly back to the highs they started at this year, and (b) investors are getting nervous about the most equity-like part of the bond market, high-yield corporate credit.
Boaz Weinstein, of Saba Capital, has tweeted that it's overvalued and a good short as defaults start to rise. Investors meanwhile yanked almost $3 billion from high-yield ETFs in the past week, per Bloomberg, nearly reversing the year-to-date inflows. And Weinstein isn't the only bearish high-profile hedge fund manager; Dan Loeb has also been warning people not to believe the January data headfake.
And if things are really looking so strong right now, as the "no landing" thesis wants to believe, then why are energy prices trading so poorly--especially amid China's grand reopening!--and lumber has collapsed almost 30% in the past month?
It is far from clear to me that markets are sending a unified "no recession" message. With apologies to the cats out there, it still feels like a dead you-know-what bounce.
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