Hold on just a second, the economy grew how fast in Q3? After countless weeks of ever more dreary headlines about the state of the U.S. economy, we received the advanced Q3 GDP numbers this week, which were quite strong. Yes, quite strong is an understatement, as Q3 GDP was 4.9% (measured quarter-over-quarter at a seasonally adjusted annualized rate). Not only did this crush consensus estimates of 4.3%, but it was the highest reported quarterly number since Q3 2014 (excluding 2020/2021 due to COVID-19 anomalies). Needless to say, this should be encouraging news in the face of ever-present calls for a recession…right?
I guess that is in the eye of the beholder, or in this case, the opinion of the economist. But there is one thing we know: even though the advanced Q3 numbers were outstanding, there still could be a recession. For one, GDP is a lagging statistic that tells us what happened months ago. Another is that GDP is “seasonally adjusted,” which means they use history to estimate the annualized impact. This can (and does) lead to some significant revisions. And finally, if you look forward, The Conference Board’s Leading Economic Index just reported the 18th straight month of declines. Not only is this the third-longest streak ever, but every streak over eight months has occurred before or during a recession.
Furthermore, according to The Conference Board, we will see a shallow recession in the first half of next year. And according to The New York Federal Reserve, there is a 56% chance of a recession in the next 12 months. Moreover, other recession signals have been flashing, including yield-curve inversion, slowing jobs numbers (but still relatively healthy), slowing housing market, and the yet-to-be-felt impacts of one of history’s most rapid rate increases.
The truth is, none of the signals and none of the experts are going to be right all the time. And even if they end up being right about a recession, how far off will they be on the timing? And if they get the timing right, will they also be able to tell you what impact it will have on equity and fixed-income markets? And if they tell you what effect it will have on the markets, will the direction and magnitude be correct?
It seems safe to say the answer will be no. And that is why it’s so important to have an asset allocation, a strategy, and a plan that works for your situation. It has to accommodate your time horizon, risk tolerance, and all the unique factors that make your situation yours.
So, instead of worrying about whether the odds of a recession next year are 40%, 50%, or 60%, make sure you are comfortable with your plan so you can enjoy living life, regardless of whether the prognosticators are correct.
Economy
- It has been a rough three months for equity markets, and this week was no exception, with the S&P 500 down -2.5%, the Nasdaq down -2.6%, and the small-cap Russell 2000 down -2.6%. Earnings reports have been generally strong; however, it has not been enough to turn the recent downward momentum.
- Core PCE prices in the U.S. increased by 0.3% MoM in September, the most in 4 months, aligning with market estimates.
- The annual rate of Core PCE, regarded as the Federal Reserve’s preferred measure of inflation, eased slightly to 3.7%, the lowest since May 2021.
- S&P Global Manufacturing PMI for the U.S. rose to 50 in October from 49.8 last month, beating forecasts of 49.5, preliminary estimates showed. It is the highest reading in six months, signaling a stabilization in operating conditions at manufacturing firms.
- S&P Global U.S. Services PMI increased to 50.9 in October from 50.1 last month, the highest in three months and above market expectations of 49.8, indicating a slight rebound in the economy.
Stocks
- U.S. equities were in negative territory. Energy and Communication Services led the decline, while Utilities and Materials outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased eight basis points to 4.85% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
