"The Growth Recession"

Good Afternoon,

It’s a new month, which means a new jobs report and a new contradictory tagline to tiptoe around calling the market environment an outright “recession.” Following Powell’s pivot from a “soft landing” to a “growth recession,” analysts have been awaiting today’s hotly anticipated jobs report to see whether the Fed’s other shoe is finally dropping.

This week, we’re diving into the Fed’s roadmap post-Jackson Hole, the slipping stock market, and potential fallout from today’s jobs report.

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In the News

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Another exciting month ahead, as investors dig deeper into sifting through conflicting economic signals. All eyes are on today's job report for further hints about the central bank's path. Keep reading for the top news this week.

The Growth Recession Origin Story

Jackson Hole got the Fed's creative juices flowing, and they've coined a new term for the still-not-recession: the "growth recession."

In his Aug. 26 speech in Jackson Hole, Powell “buried the concept of a soft landing,” said Diane Swonk, chief economist at KPMG LLP. Now, the Fed is shooting to grind inflation down by slowing growth below its potential. Officials peg this growth to land around 1.8%.

Powell has seemingly concluded that it will take more than just a soft landing to attack America’s prolonged inflation. In his Jackson Hole speech, Powell went on to criticize how the labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. In Powell’s analysis, this imbalance has led to rapid wage rises that are incompatible with the Fed’s own 2% inflation target.

As inflation continues to draw out, the Fed is pressing that its reduction will now require a sustained period of below-trend growth. To compound this lack of growth, Powell suggests there will also need to be “softening of labor market conditions.” In short, this means higher unemployment.

This shift in Powell’s message has gotten the attention of Wall Street and Washington alike. Stock prices have swooned since the Fed chair vowed to do what it takes to rid the economy of too-high inflation. More notably, politicians such as presidential hopeful Elizabeth Warren are voicing concern that the Fed could tip the economy into a recession. Senate Republican Party leader Mitch McConnell rebutted these concerns, asserting a downturn was likely and necessary in combating inflation by raising rates.

Either way, all eyes will continue to stay on the Fed and its continued strategies to tiptoe around “calling it a recession without calling it a recession.”

Kalshi markets are predicting a 63% chance that the Federal Reserve will hike interest rates by 75 bps or more come September. This is up from 52%, which is what Kalshi markets were forecasting last week.

Stocks Slippage

Monday morning's post-Jackson Hole question was "will inflation level down." After less than a day of reflection, this week's real question became "actually how big will the slowdown be." For now, markets are pricing a marked slowdown rather than a fully-fledged recession.

Marathon training kicked off earlier than expected this season as investors warn that it won’t be a simple sprint in the impending market environment. The S&P continued to fall this week, extending its 4% slide from last week. More investors are piling onto the bet that the index could fall below the 2022 low it reached on June 16. If there’s one thing investors seem to be agreeing on, it’s that it is not a time to be buying the dip.

The consecutive days of major indexes’ losses this week have been driven by expectations of tighter Federal Reserve policy following Jackson Hole sentiment. All three indexes are on track to finish the month lower, though they're still up for the quarter so far.

Jeremy Grantham, co-founder and investment strategist at GMO, says the current market “superbubble” is entering its “final act.”

Grantham rose to fame (and fortune) by calling bubbles, otherwise known as periods of market exuberance that precede crashes. Since 2017, he has declared the post-crisis bull market a bubble. In January, he went as far as to call it the fourth “superbubble” for U.S. stocks.

Today, experts are citing several factors that make the outlook even more worrisome, such as China’s continued struggle with Covid-19, record fiscal tightening, and shortages of energy, food and fertilizer from the Russia-Ukraine war.

Kalshi markets are predicting a 21% chance that the S&P 500 will be between 3800 and 3999.99 at the end of the year (12/30/22). Only time will tell if the fall and winter are going to be as tough as the painful August.

The Jobless Paradox

The jobs market is looking more fragile than Warren Buffett post-92nd birthday bash. Investors don't expect today's jobs report to help.

The Federal Reserve introduced a paradoxical strategy for unemployment to complement its “growth recession.” The Fed’s hope for a “soft landing” will rest on a “rarely occurring phenomenon.” In short, unemployment will rise not because workers lose their jobs, but because more people without jobs start looking for work.

Typically, the unemployment rate would be expected to go up because a slowdown in the economy prompts a wave of layoffs. Historically, this lack of growth has hurt household spending and kicked off a dynamic that can feed on itself. In the past, this domino effect has plunged the economy into recession.

In August, one measure of labor market strength showed some cooling. Joblessness slightly cooled at a five-decade low of 3.5% as payroll growth slowed to 300,000 from 528,000 in July. This signal has traders worried about what today’s monthly data scheduled to be released by the Labor Department will show.

To make matters worse, payroll provider ADP's report this week showed private sector employers added 132,000 jobs in August. These estimates were far less than the 300,000 expected by economists surveyed in the Wall Street Journal, and down from 270,000 jobs in July.

A caveat: ADP just revamped its methodology to account for wide disparities between its jobs numbers and the government's nonfarm payrolls numbers.

Kalshi markets are predicting just a 37% chance that the U.S. economy will add over 500,000 non-farm payrolls again in August. This forecast is up from last week's estimate of just 22%.

Lit's Pick

Feeling bearish on the state of the economy by the end of the year, so we are taking the "No" on a soft landing by December at $0.62. That's all for today, have a great Labor Day weekend!

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