Date: July 11, 2022

Staving Off Recession, For Now

On Friday the government released June employment data and revised prior months with real data, not the algo they use in real time. The economy created 372,000 new jobs well beyond expectations of 250,000 new jobs. However, April and May were revised lowed by 74,000. Wages gained 5% year over year. All in all this was another stellar report on the surface.

However, markets now seem to be in the good news is bad news regime as a stronger economy means more inflation and a more aggressive Fed. For all those declaring the US is or has been in recession, this mortally wounds that argument. While employment data is usually the last to fall, this report clearly says that the fall did not happen nor start just yet.

I will say this, I do think the unemployment rate has bottomed for this cycle. That means I believe that the jobs market has peaked and will deteriorate over the coming months and quarters. Q1 GDP did fall into negative territory and Q2 may be negative as well. However, the National Bureau of Economic Research is the final arbiter of recession, not the conventionally held notion of back to back negative quarters of GDP growth. It would be very difficult to believe they would call recession in the first 6 months of 2022 with the employment picture so strong.

Stocks didn’t do much on Friday and were actually stronger than I thought they would be when I wrote Time for a Pause or Mild Pullback. I still feel that’s the case to begin the week. Again, in a perfect world, stocks would back off 1-2% and then run higher above the June 28th peak. That series of higher highs and higher lows should/would entice more people back into stocks and create a little spurt.

Earnings season begins this week with Wall Street cutting numbers long after they should have cut. The #1 theme everyone should watch for is companies cutting future numbers and/or issuing warnings or less than rosy forecasts with the stock actually rallying on that news. That would signal the summer rally could have real legs.

On Friday we bought PMPIX. We sold PCY, EMB and some levered NDX.


Paul Schatz, President, Heritage Capital