Edition #206
Premium Market Analysis
Investors,
In this premium newsletter, I’ll be providing new analysis, commentary, and backtested results from a key study that combines the macroeconomic cycle with the stock market. While my opinion has been that we aren’t currently in a recession, we are unequivocally trending towards a recession. The primary factor preventing me from accepting that the U.S. economy is in a recession is the fact that the labor market has remained so strong & incomes continue to rise.
Over the past two weeks, I’ve analyzed recent labor market data and the divergence between gross domestic income (GDI) & gross domestic product (GDP). Quite simply, the strong labor market data is fueling the strength in GDI relative to GDP, which therefore has direct implications for the ability of consumers to absorb high inflation.
With that said, the labor market is generally viewed as a lagging indicator — telling us where the U.S. economy has been, but not necessarily where it’s going.
Why is this the case? Companies view their labor force as a dynamic lever that can be adjusted based on current economic conditions. In a strong economy, businesses expand their labor force to meet strong levels of demand. In a weak economy, businesses reduce the size of their labor force to meet weak levels of demand. If businesses believe that the U.S. economy will weaken over the next 6 months, they don’t layoff their workers today. Instead, they fire the employees only once the economic environment has deteriorated to the point at which it’s necessary to fire them. Said in a more concise way: businesses don’t contract their labor force today in order to plan for future economic weakness.
The point of this introduction is merely to express that the U.S. economy could possibly teeter into a recession quickly, depending on how the labor market evolves going forward. A fading labor market will therefore have a direct impact on consumption trends, and also worsen the anemic & negative state of GDP growth.
Today’s newsletter will share current data & analysis that explores this topic, while providing the quantitative implications for stocks & risk assets going forward. I’ll also be sharing a few of the key charts & data points that I saw this week for the stock & crypto markets, as well as the under-the-hood metrics for the S&P 500 in order to discuss general market dynamics.