Convince Me in 15 Minutes that US labor markets are on the verge of breaking down and a recession will likely follow.
With Oliver Loutsenko
Oliver Loutsenko is the Founder & CEO of OVOM Research, LLC. After working for over a decade at several of the world’s most reputable and prestigious financial services firms in a variety of roles, he created an independent research firm focused on providing investors with the highest quality, multi-asset research to meet the evolving needs of investors and financial market participants.
[01:10] Initial jobless claims and US unemployment rate are crucial labor market indicators. Initial claims, a leading indicator, tends to rise before recessions, while the unemployment rate lags.
[02:29] Small businesses, constituting 71% of the US full-time labor force, play a vital role. The National Federation of Independent Businesses survey suggests potential loosening in the labor market, leading to rising unemployment.
[05:31] Historical data indicates that most Fed hiking cycles result in recessions. The current economic situation, coupled with an inverted yield curve, raises concerns about a looming recession.
[08:55] The year-over-year change in the US M2 money supply is showing a contraction not seen since the Great Depression, pointing towards a majorly deflationary impact with a lag.
[09:37] The inverted yield curve spread suggests higher demand for shorter-term maturities, signaling pessimism about long-term economic prospects, historically preceding recessions.
[12:37] Market gains in 2023 were concentrated in the top 10 S&P 500 stocks, indicating potential fragility in the market. The unequal performance questions the sustainability of the current bullish trend.
[15:29] The cyclically adjusted price-to-earnings (CAPE) ratio is currently high, comparable to levels before the Great Depression. The historical context raises concerns about the current market’s expensive nature.
[17:44] The tight labor market, influenced by demographics and an aging workforce, has contributed to the current historic labor shortage. However, the resilience may not be indefinite, and external factors like credit events could impact small businesses.
[23:09] The market is not fully pricing in a potential recession, and if economic disappointment occurs, there is room for further market decline. High-net-worth investors may reevaluate their portfolios in a recession, contributing to market risks.
[26:37] Fed’s rate cuts typically follow soon after a recession starts. The chart shows that in most cycles, the Fed initiates rate cuts to counter economic downturns, emphasizing the importance of monetary policy lag.
[28:21] Higher interest rates lead to lower prices paid, signaling a weakening economy. Current market EPS growth estimates may be overly optimistic, with insufficient consideration for the lag in monetary policy operations.
