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Let’s Make Some Lemonade

Sometimes it’s funny how different facets of life intersect unexpectedly. This 4th of July was very enjoyable for our family this year as we spent time with friends and family despite the weather threatening to ruin the festivities. When you have young kids who are intent on lighting fireworks off in the rain, as a dad, you’re going to find a way to make it happen. The last thing I want to see is disappointed kids on a holiday meant to celebrate, amongst other things, the founding of our nation.

Making the best of a bad situation, like finding a way to light off fireworks in the rain, comes when our financial markets are doing their best to deliver a pallet of lemons to individuals worldwide. Inflation has remained stubbornly high, and the Federal Reserve has made it explicitly clear it will do everything in its power to bring inflation down. As a result, financial markets are at an inflection point of determining if a recession is inevitable due to the Fed’s interest rate hiking campaign or only probable. And if a recession is unavoidable, then will the recession be shallow and brief or elongated.

With this context in mind, I want to paint a glass-half-full (of lemonade?) picture for our newsletter today. There is no shortage of market pundits calling for a recession these days. Let’s assume a recession is a foregone conclusion because we may already be in one based on data from the Atlanta Fed. If we assume a recession is here already, it’s one of the strangest-looking recessions we’ve seen.

The job market is one of the first pieces of information I look for to gauge the health of our economy. With the thought that consumers will only maintain their spending habits if they are comfortable with their job security. If job security goes away, consumers will withhold spending, which often leads to a recession.

However, in today’s environment, we’re staring at a job market that appears very healthy. In the first quarter of 2022, the U.S. added 1.6 million jobs. In the first two months of the second quarter, we added 800,000 jobs. Yes, some companies are reducing their headcounts and hiring needs (primarily tech companies). But this doesn’t hinder the fact that there are still over 11 million job openings, and the unemployment rate is near all-time lows at 3.6%. If we’re looking for signs of weakness in the economy, it’s not currently coming through in the job market.

Similarly, the consumer remains in a financially healthier position than they did pre-COVID as cash buffers from the stimulus money and increased wages help offset the impact of higher prices at the pump and elsewhere. Data from financial companies like Bank of America have stated they’re continuing to see consumer credit and debit spending increase yearly. Specifically, they mention spending on services such as travel and entertainment is still boosted by pent-up demand. This kind of spending does not appear to indicate a consumer that is fearful of spending through a period of elevated inflation.

When we talk about the economy’s health, we’re talking about the health of the consumer and the employers employing those consumers. We’re now continuing to see both cohorts as stable and in decent shape, all else equal. Recessions can come in all different shapes and sizes, which is why the market tends to care less if we’re in a “technical recession” and more about the underlying factors driving the economy forward.

Of course, there’s always the possibility an external factor comes into play that knocks this stability askew. But until the unknown becomes known, we must continue to plan and make adjustments with the information currently available to us. This isn’t to say there are no hurdles left to leap over to get to the other side of this market volatility. We still need to see inflation drift lower, and normalization return to the global supply chain, specifically regarding energy markets. At Bernicke Wealth Management, we continue to take a value-based approach to our portfolio positioning and maintain a tilt towards quality businesses.

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