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Earlier this year we asked if a recession was coming.  It seemed like an odd thing to say at the time with the stock market within 5% of all-time highs and the unemployment rate at a 50-year low.  It sure feels like a different environment now.

You probably heard that the inflation rate jumped to 9.1% last month.  This is the largest increase to the measurement of consumer prices like food, rent, and energy since 1981.

How have consumers, money managers, and small business owners reacted to this increase in inflation?  Unsurprisingly, not well.   The small business outlook reached its lowest reading ever last month (started in 1986).

Compound Advisors

The so-called “Misery Index”, which attempts to measure the level of economic stress faced by US households, has reached the levels associated with the financial crisis of 2008 and the beginning of COVID in 2020.

The Bank of America Bull & Bear index, a measurement of investor sentiment, hit a level of ZERO last month.

Are there any silver linings out there?  Perhaps.

There are signs inflation is finally coming down.  Gas prices have decreased over 30 cents from their highs last month.

It’s not just the price of gas coming down.

“Copper is down 33% from its all-time high in March, at its lowest levels since 2020.  Corn, Wheat, and Soybeans are all down over 25% from their highs and below the levels they were at before Russia invaded Ukraine.  Used Car prices are down 7% over the last 6 months.  In 2020, this was one of the first areas to spike higher, in advance of broader inflationary measures.  Hopefully, the current downturn is a leading indicator of lower inflation rates to come.”

Compound Advisors

As of the time of this writing, the latest US GDP data will be coming out and it’s forecasted to show negative growth for the second quarter in a row.  Does that mean we’re in a recession?  If you read the news, the answer seemingly depends on which political party you ask.  It’s ultimately up to the up to the National Bureau of Economic Research to officially make a recession call but I’d argue this is largely semantics at this point.  Besides, recession calls make a lousy sell signal.  Why?

First, recessions aren’t officially called until after the fact – sometimes long after.  The recession caused by the housing crisis started in January of 2008 and wasn’t called by the NBER until December of that year.  The stock market had already dropped over 40% by the time that call came out.  The brief recession we had in March of 1991 wasn’t called until December of 1992!

It’s hard to dispute the data that the economy is slowing.  Then again, how much of a downturn can we be in if job openings are historically high and consumer spending is strong?  Ultimately we’ll let others argue about whether or not we’re in a recession or not.

If it does turn out that we’re in one or about to be, you can see it could be a better buying opportunity than anything.  Here’s every recession since World War II along with S&P 500 returns before, during, and after:

A Wealth of Common Sense

There’s always the chance this gets worse and/or we end up in an environment that’s close to 2008.  But you have to be optimistic looking at this table if you are a long-term investor.