It’s a Recession! Well, Maybe It’s Just a Correction

The US equity premium has showed us where the bottom is – at near-zero, on July 2 – when the Biden senility crisis was just beginning, and we warned that markets would be discomfited by it. The crisis has triggered a reexamination of beliefs, especially the perpetual growth power of the Magnificent Seven. With a non-zero ERP and long-term yields below sustainable levels in the post-pandemic epoch, a tactical asset allocation move toward equities is called for. The Sahm Rule was ambiguously triggered Friday, but only because the labor force expanded. Today the 2-10 yield curve briefly disinverted. Historically it is the disinversion, not the inversion, that gives the recession signal, but so far this cycle the curve has been the wrongest ever. ISM Services at 51.4 contradicts Friday’s Manufacturing at 46.8. Forward earnings growth continues strong. Payrolls are growing. July CPI should report next week as outright deflation, making inflation is a solved problem. Housing transaction values remain above the pre-pandemic trend. Capital expenditures remain near all-time highs, and debt-service ratios are near all-time lows. Bank lending is accelerating. The Fed will not respond to a market panic with an emergency cut. Unless more recessionary data comes out, we don’t think the September cut will be more than 25 bp.