Strubel Investment Management commentary for the month of August 2024, title, "recession worries?"
Dear Investors,
In the span of a few days, the market switched from being worried about inflation and the timing of future Federal Reserve interest rate cuts to panicking about a potential recession. The market dropped approximately 6% in just three days and is still about 8% off its high back in July. (The market is still up about 11% for the year as of early August.)
The chief concern of the market was the weak July jobs report of a projected 117,000 jobs created versus expectations of 170,000 jobs. Another factor that probably contributed to the steep market drop was Japan’s stock market, which crashed by about 20% over the same three days. (Japan’s market opens before the US market, so the Japanese market’s dropping happened chronologically before the US market drop each day. Thus, the US market was reacting to the Japanese market.)
While the low pace of job creation isn’t ideal, it’s important to take a holistic look at the economy to see if there truly is a reason to worry. If we are on the cusp of a recession, then we should see that reflected across various economic measures. But that just doesn’t seem to be the case.
Intermodal (containerized) rail traffic is strong and still well above its levels from last year.
Retail sales are still growing by about 2% per month when compared to the same month of the previous year.
Tourism, a highly discretionary spending item, is still going strong across the globe with almost all regions showing arrivals above pre-pandemic levels and spending in all regions well above previous levels. Tourist arrivals in Europe were 1% above pre-pandemic levels, and the Americas are almost back to pre-pandemic levels (and, most importantly, all regions were seeing growth).
In fact, tourism is growing so much we are seeing protests against tourists across Europe, in Spain (Barcelona and Mallorca), Greece, and the Netherlands.
Italy recently added a tourist tax for day trip arrivals in Venice. Santorini in Greece reported record visits, and the mayor is talking of trying to limit cruise ship arrivals. Record visits, talk of limiting cruise ship arrivals...these are not the current events you would expect to read about if a recession was looming.
Most big banks, which have near real-time insight into consumer spending, also reported earnings in July and largely reported no signs of consumer spending slowdowns outside of a subtle rotation of discretionary spending into non-discretionary spending for very low-income consumers. Additionally, credit card loss rates for the largest banks have started to normalize.
Finally, the Atlanta Fed’s real-time GDP prediction model (GDPNow), which has generally been the most accurate for the past several years, is showing next quarter’s annualized GDP growth at 3%.
So, we have to ask ourselves: If weekly rail traffic is strong and growing, if we have a record-breaking tourism season across the globe to the degree that locals are protesting tourists, if we have official retail sales data showing growth and banks saying that their real-time view of consumers looks fine, and we have predictions for 2-3% GDP growth next quarter, then is that what a recession on the horizon would really look like?
Might the labor market be a little weaker than would be ideal? Sure, that’s possible. Maybe growth will slow a bit? That’s possible. But it’s very difficult to see a major issue when a huge plurality of data, especially more reliable weekly data, shows the economy still doing fine.
