recession watch

The Weirdest Recession Ever?

photo shows a magnified image of the word "definition" in a dictionary

It’s been months, but one of the biggest words from 2022 is still in the air: recession.

Are we headed into a recession?

Are we currently in a recession?

Are we already recovering from a brief, sort-of recession?

Depending on how you want to answer, any of these might be true. The definitions vary, so the answers do too.

The most common definition is based on multiple quarters of falling gross domestic product—the sum of all national economic activity. With GDP numbers declining slightly throughout the first half of the year, we technically found ourselves in a recession.

But the next important figure economists look at to determine recessions is unemployment, which remains near 50-year average lows. So by that measure, the economy is still sizzling!

Through the lens of the stock market, we again find conflicting answers. For most of the statements investors received in 2022, many holdings were down. But at the same time, many of those companies were reporting record earnings. According to stock prices, we are in a recession; according to stock earnings, we are still in a growth cycle.

So how can investors make informed decisions, when even economists struggle to agree on the nature of a recession?

Here, we believe taking the long view is instructive: we cannot say with full certainty whether we are currently in a recession, nor whether we will be in a recession a month or two from now. But we can know with absolute certainty that there will be recessions in the future—which also means that recoveries are still on the horizon, too. Night, day. Recession, recovery.

We know that the economy is cyclical. It has its upturns and downturns. But if you are investing for the decades ahead—maybe your future retirement or for a legacy for your children and through generations—your concern should not be on what the economy is doing today, next quarter, or even next year.

Your focus should be on trying to grow the bucket the best we can for the long haul.

We don’t ignore the day-to-day action, of course. But in good times and bad, we allow ourselves to be guided by simple, timeless principles. We focus on avoiding market stampedes and looking for the best bargains we can find. And these principles, we believe, are equally important whether we are in the depths of recession or a roaring expansion.

The talking heads can keep on debating whether we are in a “real” recession or not. That is what they are paid to do, after all. Meanwhile, we are going to keep on doing what we are paid to do: trying to grow the bucket, find opportunities, tweak portfolios.

Feel free to drop in or give us a call if you’d like to talk about this, or anything else.


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Seasons and Cycles: Things Grow and Things Rest

photo shows four leaves at different point of their life (dark brown, light brown, yellow, and green)

Even in the heat of summer, I can’t help thinking about the cycles of nature—such a useful way to think about the cycles in the economy and the markets.

Winter, the fallow season, is a time for regeneration and recharging, getting ready for future growth. In spring seeds are planted and the first green shoots hint at better days ahead. Then a season of growth produces crops in a cornucopia of kinds and colors, to be harvested in the fall. Then it is time for rest and rejuvenation again.

Likewise, the economy grows and rests in turns. In recessions, excesses get corrected. Overall business activity shrinks. Resources used by businesses generally decline in price. Ultimately, a new growth cycle is spurred by the impulse to make a dollar by meeting the needs of others. Producers of goods and services prosper, until excesses create the conditions for recession again.

Unlike nature, however, the economy has a less-set schedule. The last recession was a just a two-month affair; some are two years long. Growth cycles may also be long or short. And further complicating things, some investments do well when others do poorly.

So we look for companies that have seasons of growth ahead, the best bargains we can find. For some holdings, it pays to own over extended periods, firms that dominate their sectors and will emerge from slowdowns in better a position to prosper in the future.

And when the slowdowns occur across the whole economy, we trust that, just as winter gives way to spring, the economy will find new growth after the recession. It always has, every single time in American history, although there are no guarantees about the future.

Clients, if you would like to get your portfolios in closer alignment with the seasons in the market, please email us or call.


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The Best Way to Get to Know a Recession

photo shows a foggy bend in a road

Tolstoy’s great novel Anna Karenina begins, “All happy families are alike; each unhappy family is unhappy in its own way.”

This seems like stretching a point. In my life, I’ve had the good fortune to know many happy families, all quite different. But the quote does capture the uniquely lonely feeling that can come with misery.

The market, we believe, operates in much the same way. Bull markets can cover up a lot of performance differences, and although no two bull markets are quite alike, most investors are generally going to be happy regardless.

But each and every recession hurts in a unique way. We just have to wait.

The market behaved very differently in the tech wreck of 2000–2002 than it did in the Great Recession seven years later. And what we see now is different than either of those!

In a conventional recession, heavily cyclical companies like manufacturers get hammered hard. But cyclical companies generally understand the boom-and-bust cycle and plan for it with their savings.

Consumer goods companies on the other hand might take it for granted that people will keep buying food and clothing and other necessities, so they generally do not keep as much cash on hand. The short, sharp shock we experienced earlier in the year took out a lot of retailers that might have weathered a longer, shallower recession.

Homebuilders are normally one of the biggest casualties in a recession, but they are doing booming business now. So are the companies that make the materials they work with. Many big tech stocks, normally volatile and erratic performers, have been scorching the markets.

This is a stark contrast to the 2007 recession, when the housing market cratered and took out a lot of homebuilders, or the 2000 recession, when growth tech stocks got demolished.

In all likelihood, those previous recessions helped set the stage for these sectors’ current outperformance. Going into this downturn “everyone knew” that homebuilders were going to get wrecked because it happened last time.

Perhaps in five or 10 years there will be big opportunities for investing in restaurants or cruise lines as the next recession prompts investors to flee the businesses that got hit hardest in this one. No guarantees.

Every downturn is different, and we have no way of knowing what the future will hold. All we can do is stick to our principles: avoid the stampede and seek out bargains. Sectors that get trashed in one recession may be found in the bargain bin before a different recession. This is why we study and keep our eyes open.

Clients, if you have any questions, please call or email us.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

When Will the Next Recession Arrive?

© Can Stock Photo / iDesign

We know the economy, like the markets, goes up and down. It expands and contracts, as naturally as the tides come in and go out, or day gives way to night. Although much in life is unpredictable, it seems worthwhile to consider where we might be in the economic cycle.

The collapse of one or more of four major economic sectors has long been a factor in recessions. Home building, auto sales, capital investment by business, and inventories have been susceptible to booms and busts. Currently, three of these remain below long-term averages while auto sales seem to be at a sustainable pace.

LPL Research recently examined the Leading Economic Index and concluded that ‘plenty of gas remains in the tank’ for a growing economy. The index is based on ten separate data points, which we find have a history of usefulness: average weekly manufacturing hours; average weekly new claims for unemployment insurance; manufacturer’s new orders for consumer goods and materials; the Institute for Supply Management Index of New Orders; manufacturer’s new orders for nondefense capital goods excluding aircraft orders; building permits for new private housing units; stock prices for 500 common stocks; the Leading Credit Index; the interest rate spread (10-year Treasury bonds less federal funds rate); and average consumer expectations for business conditions. We concur with LPL Research.

The bond market gives us hints about the possible direction of the future through the yield curve, which remains pointed in the right direction for continuing expansion. So the fundamentals for continuing economic growth seem to be in place.

Do we have worries or concerns? Shoot, yes. The world is an uncertain place. There are political risks as long-standing relationships with our allies change, and potential new rules about trade and taxes promote uncertainty.

As long term investors, we do not need to fear recessions—we need to be ready to take advantage of any bargains that may result. We have taken steps to try to mitigate risk, although there are no guarantees against unwanted and unexpected volatility.

Bottom line: we expect continued growth in the economy, but we will try to be ready for anything. If you would like to discuss how this applies to your situation, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in mutual funds involves risk, including possible loss of principal.

Stock investing involves risk including loss of principal.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Memento Mori

© Can Stock Photo / boggy

In ancient Rome, it was customary for the city to throw lavish triumphal parades in honor of victorious generals. The whole city would turn out to celebrate those who had brought glory to Rome. For a successful general, it was an intoxicating reward.

Lest their generals become too intoxicated with success, however, the Romans would assign a servant with a unique task. Their job was to follow the triumphant general throughout the festivities and periodically whisper in their ear memento mori: “Remember, you are mortal.”

It is humbling advice, and one that we would do well to remember. The markets have had several great quarters lately, leading to the Dow average topping the dizzying benchmark of 20,000 points for the first time last week. We have no way of knowing how high it may get in this rally or the next, either.

We do know one thing, however: no rally lasts forever. No matter how high the market soars, it can always drop back down. We don’t know when, and we don’t know how much, but someday that day will come. There is always a recession in our future.

Our goal is to try to minimize the damage by avoiding stampedes when we see them. When investor sentiment gets overly exuberant, when we start hearing people say “You can’t lose money in the stock market”, this is when we must pay heed: “Remember, market rallies are mortal.” We are confident that in the long run the markets may bounce back from future downturns as they have always done before and we can potentially be better off afterwards—but the recovery will undoubtedly be slower and more painful if we fall into the trap of thinking that our portfolios are invincible just because they’re doing well now.

We’re thrilled with our performance over the past year and excited about the continued evolution of our portfolio strategies. At the same time, we know that nothing lasts forever. At some point in the future, we will have to reckon with another downturn. It might be in a year, or it might be in five years. Either way we must keep this inevitable fact in mind if we hope to try to mitigate the damage. If this weighs on your plans and planning, give us a call or email us to discuss your situation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

Slow Burn

© Can Stock Photo Inc. / cafaphotos

We are now in the 7th year of economic expansion and recovery since the last recession. Many commentators insist that after such a long stretch, the next recession must surely be right around the corner. Of course, they’ve been insisting this for the past 7 years–remember the term “double dip”? The recovery didn’t make it a full year before people started predicting its demise, and now here we are seven years later.

Part of the longstanding skepticism surrounding this market cycle is grounded in the weak performance of this expansion. It’s been a long, slow recovery since the recession started in 2008. In a lot of people’s minds, those two things don’t go together. They think, “The recovery is going slowly, so it must not have enough fuel to keep going for very long.” There is a certain intuitive appeal to this way of thinking. We tend to see something moving quickly as having more momentum, so it would take longer to come to a stop.

The economy doesn’t really work in terms of “momentum”, though. Instead, market cycles tend to be driven by sentiment. In a normal expansion phase, optimism feeds into faster and faster growth, eventually creating a bubble. When the bubble finally pops at the height of its exuberance, values plummet and the economy is likely to plunge into recession.

You can think of it in terms of an out of control fire. The bigger it gets, the stronger it gets—but the faster it burns through its fuel. A raging conflagration will consume its fuel and die down to embers faster than a more contained fire.

In this analogy the current economic cycle has been a slow, cautious burn. The fire is burning away quietly but hasn’t really erupted into a general blaze—pessimism is widespread and we haven’t really seen the kind of manic stampede that marked the last days of the previous few expansions.

We never know how much fuel there is left for our “fire.” The expansion must eventually run itself down, but this may be a matter of months or days or years—we can’t be sure. However, we view the slow pace of recovery as an indicator that there may be a good bit of fuel yet untouched.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Next Recession is Coming, Continued

Federal Reserve Bank of St Louis
Federal Reserve of St. Louis

Once again it is time for our quarterly assessment of economic conditions. Is the economy growing or shrinking? This is the fundamental question.

The next recession is always out there, of course, as is the recovery which will follow it. The excesses that build up in good times lead to imbalances that get corrected by economic downturns. But what are the current indications?

• The Index of Leading Economic Indicators is supposed to point to the direction of the economy in the months ahead. It has remained solidly in positive territory.
• The bond market speaks to us about economic conditions through the yield curve. Although it has flattened somewhat recently, it remains in growth mode.
• The Current Conditions Index from LPL Research remains in positive territory.
• The “Overs,” a proprietary LPL measure of potential over-spending, over-borrowing, and over-confidence, point to continuing expansion.
• Details on the LPL Research work are available here.

Economic news is always mixed, and can always be better. But jobs and incomes and spending continue to grow in fits and starts. The weight of the evidence says we are doing OK, at least.

We do have challenges. Policy makers attempt to manage the economy from above, using a philosophy that was discredited long ago. Their interventions create distortions which we monitor carefully. Much of our work involves avoiding the problems created by people trying to “help us.”

We are on the job, doing the best we can to preserve your interests and take advantage of opportunities as they arise. Call or email us if you have questions or comments.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly.

The Next Recession is Coming… Again

chart from research.stlouisfed.org

Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.

The most notable feature of the current economic expansion is its slow, plodding pace. Most people with jobs or in business are familiar with one of the reasons for this: unprecedented expansion of the regulatory state. Our shop and many others in many lines are coping with new kinds of nonsense that hampers production or service. (We are not arguing for a Darwinian, regulation-free society, of course.)

The silver lining in our plodding economy is the lack of a boom in any major sector that could create a big downturn. New home construction has not really exceeded the sixty-year average. According to the National Auto Dealers Association, vehicle sales–while near a record–only replaced 1/15th of our vehicle fleet last year. It seems to us that the peak in auto sales lies ahead of us. Capital spending and business investment, which has at times gotten too inflated in the past, has remained extremely subdued.

Energy, of course, did boom—and then busted. But our diverse and dynamic economy has largely absorbed the job losses, and consumers and businesses are enjoying unforeseen low gasoline and energy prices. Corporate earnings have not been great, but should strengthen in the quarters ahead.

The Index of Leading Economic Indicators points to near-term trends in economic growth, and it has flashed a steady positive reading for years. The bond market speaks to us about economic conditions through the yield curve, which remains encouraging and positive. LPL Research publishes a Current Conditions Index which measures economic vitality right now—and it has remained in positive territory. LPL Chief Economist John Canally draws mostly comforting conclusions from the latest labor market statistics (ht.ly/v7Co3003MvP )

So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either. This is good news for investors.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Next Recession is Coming, pt 2

© Can Stock Photo Inc. / albund

Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. We humans are great at this: taking a good thing too far. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.

Because investment trends are based loosely on what is going on in the real economy, it makes sense to think about where we might be in the economic cycle. So from time to time we report to you the state of the economy as we see it, with an eye on that next recession. Hat tip to LPL Research, people who do a lot of work on topics we need to know about.

In his latest report, LPL’s chief economist John Canally looked at the current fears in the marketplace and compared them to the groundhog. Many people pay attention to the groundhog, but he actually isn’t worth a darn at weather forecasting. Likewise with the drop in the price of oil, the rise of the dollar, some shrinkage in one sector of the economy—people are paying attention, but these things are not good at forecasting recessions.

Canally also compares the current situation to the 2007 economic and market peak and how things look for consumers. The savings rate is more than double, the mortgage rate is better by a third, household debt is a lower percentage of income and falling, and gasoline prices are….well, you know. Bottom line, we’re in pretty good shape.

Did you know the bond market provides a recession forecast that has worked very well since 1950? The bond market speaks through the yield curve, a simple measure of whether shorter term rates are higher or lower than longer term rates. When short term interest rates get above long term rates, there has always been trouble ahead. LPL’s Anthony Valeri just released a study concluding that the yield curve is not indicating recession.

We’ve never had a recession in recent history that was marked by strong jobs growth. And here we are, with a record 64 straight months of jobs growth. Nor has a drop (or a crash) in the price of oil ever precipitated a recession. The oil price drop is a mixed bag: the energy industry has been hit hard with job losses and reduced corporate earnings. But the losses to energy are gains to the rest of us.

So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.