The good news is in the headlines. On the same day that the S&P 500 stock index hit all-time highs, consumer confidence (the University of Michigan’s consumer sentiment index) climbed dramatically to 78.8 from 69.7 in December. This is the second month in a row that the index has seen a strong gain, and the index is now at the highest level since July 2021.
The good news is all around us. Stocks soar, GDP remains strong, consumers have regained their confidence, unemployment is low, and it appears the Fed has finished raising interest rates.
The stock market is salivating at the idea that rates will drop – encouraging investors to leave their money market funds behind and buy stocks. And it appears that the fed has engineered a “soft landing” for the economy, avoiding recession as it slowed inflation.
The logic of that thinking is compelling. But Jim Stack of InvesTech Research, who has published a must-read newsletter for more than 40 years and has an excellent track record of calling major turns in the economy and markets, says there are major red flags waving today—both for the stock market and the economy. And he has history on his side.
A Soft Landing?
Stack’s latest newsletter points out that past predictions of a soft landing have proved dramatically wrong.
For example, on Feb 15, 2007, just before the worst recession since the Great Depression, then Fed-Chairman Ben Bernanke firmly proclaimed that the economy was headed for a soft landing. A few weeks later, then-President of the San Francisco Federal Reserve Bank, Janet Yellen, proclaimed the economy was on a “glide path to the proverbial soft landing.”
Just last week, now-Treasury Secretary Janet Yellen’s comments generated this headline from Bloomberg: “Yellen Declares US Economy Has Achieved Soft Landing.”
Stack points out that there have been more media mentions of a “soft-landing” in the past 24 months than the previous two pre-recessionary periods combined (2000-2001 and 2006-2007). And both of those recessions led to stock market declines of around 50%!
Stack says there’s plenty to worry about in the economy, noting the Conference Board’s Index of Leading and Coincident Indicators, has now fallen for 20 consecutive months – the third-longest streak ever. The two other longer streaks of declines (tied at 24 each) immediately preceded the recessions of 1973-74 and 2007-2009.
Stack opines that under the low headline employment numbers, warning signs about the labor market include a sharp drop in the number of people willing to quit their jobs – the “quits rate”. And the pace of new hires has dropped back to its lowest level since 2014. Combined, he says, “that is a sign of falling employee and employer faith in the job market.” (Request a free copy of his latest newsletter at www.Investech.com.)
A Bull Market?
While the S&P 500 makes new highs, Stacks latest letter issues a warning that falling interest rates are no guarantee of a bull market. In fact, quite the contrary.
During the unwinding of the 2000 “dot-com” tech bubble, the Fed started cutting rates as soon as the stock market started falling. In fact, he notes, the Fed cut the discount rate 11 consecutive times during the subsequent 2-1/2 year bear market but “couldn’t halt the inevitable unwinding of the valuation bubble on Wall Street.”
Can the Fed pre-empt a bear market with cuts? “In 2007, the Fed’s first rate cut came before the final top of the bull market in October of that year and once again, as a deflating housing bubble permeated through the economy, the Fed’s 9 subsequent discount rate cuts couldn’t prevent the far-reaching consequences and severe bear market.”
Economic and stock market forecasting always generates conflicting opinions. But with the headlines leaning all in one direction, it might be time to reassess your own risk tolerance. If you’re still contributing to your retirement account on a regular basis, you will automatically “buy the dips” – and profit in the long run, despite bear markets. After all, we are at all-time highs.
But if you are in, or nearing retirement, and no longer contributing, it’s time to take a second look at your stock market exposure. Your time horizon is shorter – and your need for liquidity to fund your retirement lifestyle is greater. And that’s The Savage Truth.