Defying Logic: A Recession Is Coming… Even as Stocks Rise
Andy Snyder|February 10, 2022
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You may recall we made waves a few weeks ago. We made a big prediction. We said the American economy was in for a recession in the second half of this year.
Ouch.
If things go as we think they will, the nation’s gross domestic product will shrink in the back half of the year.
To us, it’s obvious. Trouble is brewing.
We also made a less obvious call… that stocks will remain the place to be.
The textbook writers would tell us we’re flat-out wrong… that what we’re calling for has never happened before. They’d say it defies logic.
Good, we say. Welcome to Manward… where we live outside the norm and have a nasty habit of being spot-on.
Here’s how we’ll prove the critics wrong once again…
Despite the economy shrinking, stocks will continue marching toward Dow 100K.
On its face, that makes no sense. Stocks follow earnings. And if the economy is moving backward… then earnings will also be going backward… and so stocks must follow.
But buddy ol’ pal, that’s using too much logic.
That’s assuming things will be allowed to work the way they’re supposed to work.
It’s true that the stock market shouldn’t rise in a recession. Historically, that’s certainly been the case.
But look around… Look at the headlines… Look at what’s been done over the past two years… We’re living in historic times. None of this is “normal.”
So here’s how we see the next 10 months playing out.
Turn Back the Clock
The Fed will raise rates in March. The market will hardly react. Investors have spent the past month “pre-reacting.” Rate hikes have already been priced in.
Jay Powell will see the market’s tepid response… he’ll see that inflation hasn’t slowed… and he and his troops will continue to raise rates.
Markets will climb at a moderate pace. Most companies will report decent earnings with widening margins.
But here’s the thing… These hikes will coincide with a downturn in the pandemic’s effects. The supply chain will be normalizing. Supply and demand will be leveling in balance. And the economy will be getting back to what it looked like at the end of 2019… before all this money printing, stimulating and manipulating kicked off.
That sounds like good news.
It’s not.
Open up the archives, and you’ll see that in December of 2019, just about every analyst was worried about a recession. The yield curve had flipped upside down, earnings were falling and a slowdown was in the works.
Then COVID-19 came and blew it all away… into the future.
Here Comes Trouble
But as we get back to “normal,” we crawl back to an economy that was anemic. We go back to an economy that failed to grow by even 2% each year… for more than a decade. And we go back to a time when companies squirreled away cash because they had nothing better to do with it.
It’s all coming just when the Fed is raising rates.
That’s trouble.
By June, the trend will be obvious. A recession (likely a mild one) will be unavoidable.
The Fed will see it. Powell will call the end of rate hikes by November. The doves will come back. And the money printing will fire up again.
The bulls will line up at the trough, knowing the free-money bonanza that got us here is back.
In tougher terms… the heroin addict will get out of rehab and be picked up by his drug dealer.
We all know what happens next.
The market gets a big shot in the arm.
The textbooks say it’s not right. And it’s not.
But as our beloved Joel Salatin tends to say… “This ain’t normal, folks.”
The bulls aren’t going anywhere.
