The Importance Of Recession Watch In 2023 For Investors

Once again, let's pull out the recession-watching binoculars from the shelf after putting them on the shelf for a while.

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Sure, you're going to tell me that recent big numbers on retail sales and non-farm payrolls are suggesting that a recession is not in the cards for 2023. It seems that Goldman Sachs economists agree with this argument and that it is a valid one.

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Based on "continued strength" in the labor market and "early signs" of improvement in various business surveys, the investment bank's economics team has reduced its recession probability forecast to 25% from 35% — consensus expectations still put a 65% chance of a recession this year.

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That's great.

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Despite subpar earnings reports, the market continues to react positively, which you wouldn't see if economic growth were headed for a steep decline. This week, we will be putting all of these reactions to the test again as Home Depot (HD) and Walmart (WMT) release their outlooks.

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Even with all of these positive developments, investors seem to have forgotten one crucial thing amidst all of these good times.

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Two weeks ago, the Federal Reserve reminded everyone who is in charge over a period of two weeks.

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Comments from Cleveland Fed president Loretta Mester? Hawkish. St. Louis Fed president Jim Bullard? Hawkish. Atlanta Fed president Raphael Bostic? Hawkish.

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As of now, we are hearing chirps on Wall Street that the Fed needs to lift interest rates by 50 basis points at its upcoming meeting in order to combat this string of strong (and inflationary) economic data over the last few months.

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The combination of all of these factors has increased my own recession probability from where it was a couple of weeks ago.

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How come? This is what history suggests.

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Since 1961, the Federal Reserve has embarked on a cycle of rate hikes that have crushed inflation nine times. There were eight times during that period when a recession followed, according to a report from Piper Sandler published in 2022. In 1994, there was only one real soft landing in terms of the economy.

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In early 2022, Gundlach was one of the first people to warn me of the possibility of a slowdown in growth when he spoke with me from the comfort of his California home. Bitcoin was also mentioned in his warning.

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In both calls, he was right on, and I suspect he will have more wisdom to share this week as well.