MacroVisor
Posts
The Weekend Edition # 138 - The US Skipping a Recession

The Weekend Edition # 138 - The US Skipping a Recession

Market Recap: Lopsided; Closing Thoughts: The Week Ahead

Ayesha Tariq
June 23, 2024

Welcome to another issue of the Weekend Edition!

Thank you for reading and subscribing to our newsletter.

Market Recap - Lopsided

June 17 - June 21, 2024

Source: Koyfin

The week started out on a solid note, with Nvidia taking the lead and crossing $140 to become the largest company in the world, by market cap. It was a shorter week with US Markets closed for Juneteenth on Wednesday. Thursday brought us a tough day, as we saw strong selling in Nvidia which put pressure on the markets. Friday brought us the biggest Options Expiry at $5.1 trillion in notional, and that caused a lot of choppiness as well. Nevertheless, the weekly performance was positive overall.

The Mag 7, and more specifically, Nvidia has now become the market. What we’re seeing is quite remarkable really. Market breadth has narrowed considerably. We talked about this in the last weekend note, but it simply doesn’t seem to be slowing down.

This is a chart that I had posted several weeks ago, which shows the ratio of the S&P 500 market cap-weighted index to the S&P 500 equal-weighted index. As you can see, the line tends to increase in times of crisis, because everyone wants to hide out in a handful of quality names. Well, this time, we’re closing in on levels last seen during the Great Financial Crisis in 2008 - 2009.

Source: StockCharts

On the macro data front, we had a mixed week. We saw housing starts and building permits decline - which add to worries of higher home prices in an already tight housing market. US Flash PMIs came in higher, showing improvement in business activity but, also showing a reduction in pricing pressures. This is certainly a positive sign for inflation.

Commodities

Source: Koyfin

We’re seeing some risk off in commodities, as markets shrug off some of the market worries. We saw good news from the US CPI and last week, the UK also saw headline inflation drop to the 2% target.

Crude Oil, however, has started to see some strength as the summer season is upon us, as we wrote it last week’s note.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - The US Skipping a Recession?

As I see it, there are multiple forces playing on the US Economy and Markets right now. We have a situation that is odd, for lack of a better word. We have the markets surging - the S&P 500 hit 31 all-time highs in 2024, and it’s just June. We have an economy that is still resilient in the face of an aggressive hiking cycle and an extended period of high rates. And, we have fiscal policies that have defied all expectations and will continue to do so in an election year, creating what is by many measures a looming debt crisis.

I read somewhere a few days ago that we are “late cycle” in terms of the economy, and therefore the next stage is a recession. Yes, theoretically this is usually how the cycle progresses. So let’s look at what each of the phases in the cycle is supposed to look like and where the US Economy lines up.

Growth: Moderating = Late cycle
Credit: Begins to Grow and PMIs are improving = Early cycle
Earnings: Coming out of a recession for the S&P 500, still in a recession for the Russell 2000 small caps = Late to Early Cycle
Policy
- Monetary Policy: Contractionary (I can’t call it neutral because we’re still at a high level of rates) = Late Cycle
- Fiscal Policy: Simulative but slowing somewhat = Early to Mid Cycle
Business: Sales Growth falls / Equilibrium & Inventories still low but some growth = Mid to Late cycle

Summarized, this looks like this:

As you can see from the above, we’re in quite a mixed stage of the economic cycle. While many signs point to a late cycle, we have a situation where there are plenty of early cycle factors coming into play as well. One could argue that we are moving from late cycle directly to early cycle, skipping the recession stage.

This is why there are so many calls for a soft landing. Some are talking about skipping to early cycle without a rebound in GDP growth which would indicate a no landing.

Just as well…

Last week, the Congressional Budget Office (CBO) came out with a new set of estimates. They’ve added another $400 billion to the US Fiscal Deficit for FY 2024 and $2.1T for the period between 2025 and 2034, to reach $22.1T

Source: USDebtClock.org

US total debt has risen dramatically, from almost $6 trillion in 2000 to nearly $35 trillion currently. Projections for 2028 suggest total debt could reach $46 trillion, with interest payments surpassing combined Medicare and defense spending. CBO projects debt at $50.7 trillion by 2034, equaling 122% of GDP.

Source: CBO June 2024 Report

Debt crises often happen when people suddenly lose confidence in the economy, causing heavily indebted economies to collapse quickly. Because these shifts in confidence are unpredictable, it's hard to know exactly when such crises will occur, but the risk is always there.

All things considered, we better hope that the economy skips the recession because an easing of fiscal policy during a recession will mean more debt and a deeper fiscal deficit.

Closing Thoughts - The Week Ahead

The US PCE inflation numbers will be released on Friday, June 28 and prior to that we have the first televised US presidential debate on Thursday.

Finally, it’s also the month-end next week. If we look at June on a weekly basis, we’ve seen three positive weeks and the market is now overbought and quite likely ready for a reversal. Month-end’s also bring us rebalancing (and this time it would be quarterly rebalancing) and post Options Expiry flows are weak. So we may see some pressure next week, ahead of July which is seasonally a strong month.

The chart below shows us the seasonality for 20 years of performance for the S&P 500.