Chuck Jaffe: The recession may already be here — we just aren’t calling it one

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You can have a recession without a market correction or bear market.

The recession everyone was expecting at the start of this year has not been canceled. The question is what it will look like when it arrives.

For all the optimism that accompanied the stock market’s recent runback to shouting distance of record highs, there is still plenty of economic trouble to get through before the completion of the current economic cycle. Experts are increasingly coalescing around soft-landing scenarios, though there remains a wide spread of debate.

But what if this — right now — is the recession?

While I still expect something significantly worse to happen, the evidence suggests that we are surrounded by plenty of elements of a recession right now, just not enough to qualify officially as “The Recession.”

As much as investors conflate economic downturns with stock market crashes, you can have a recession without a market correction or bear market.

Yes, it would be weird for investors to be giddy about the stock market while the economy is in recession, but these times are nothing if not a little weird.

Formally, recessions are decided by the National Bureau of Economic Research, whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

That’s not to say that every recession rings all those bells and whistles; the pandemic-triggered recession of 2020, for example, lasted just two months, yet earned the NBER’s recession stamp.

A year ago, market observers were virtually all calling for a recession. Some wanted it codified then and there because the economy went through two straight quarters of negative GDP growth. When I studied economics in college — which was in the middle of the 1980s recession that was the worst economic downturn the country had seen since the Great Depression — that would have been enough for my professors.

Yet last year, despite the economic slowdown those declining GDP quarters represented, there were some deep pockets of economic strength. Consumers were spending, the employment backdrop was solid and — despite the market’s pain — there wasn’t enough misery to rise to the level of a recession.

“What was being priced in last October was a full-blown recession, a full-blown shut down, full-blown big-time problems,” said Ryan Detrick, chief market strategist at Carson Group in a recent interview on my podcast, “Money Life with Chuck Jaffe.” “Now we look at things, we don’t see a recession … Parts of a recession, and moving from one part to another, sure, but not the recession everyone was expecting.”

Detrick is more optimistic than most market observers, but the scenario he sees is what can be called a “rolling recession,” where the downturn pushes through various elements over time but doesn’t go through them all at once.

That’s how current conditions could be the recession. The big stock- and bond market losses of 2022 felt bad, but the decline in GDP growth last year to the current earnings season — which will mark the third straight quarter of earnings declines – is an economic signal. You could call that “an earnings recession.”

A rolling recession is what we are in until the real recession actually shows up.

In all likelihood, a rolling recession is what we are in until the real recession actually shows up. If you are looking for when that will be, take your cue from the dark times of 2022.

The inverted yield curve — a measure which has always presaged a recession — has an average lead time of 19 months, which means it is calling for a recession to hit in December 2023 or January 2024. Leading economic indicators tend to go negative about 10 months ahead of recession, meaning a delivery date late in this quarter. Lending standards got tighter late last year, which typically happens about 10 months ahead of recession.

“We’re at the cusp of when we will see some of the moves in monetary policy really begin to impact the economy,” said macro strategist Jim Welsh of the Macro Tides newsletter, in an interview on my show.

He added: “To the extent that comes true, it should pose a headwind to the market since it has been predicated on ‘We thought we were going to have a recession, now we don’t have to worry about one,’ just at the point where the economy is going to show more material signs of slowing, along with a tick up in unemployment between now and the end of the year.”

Similarly, Nanette Abuhoff Jacobson, global investments strategist at the Hartford Funds, said on my show that markets have priced in a soft landing and the belief that the Federal Reserve can pull it off. But when recession shows up — and she is calling for one — she says it will be rougher than most people expect.

The good news, if there really is any, is that the rolling recession will spread out the pain; the damage will be more about length of time than the depth of the fall. The recession will roll into something worse — to where it finally gets acknowledged for what it is — before it gets better. But as recessions go, it’s not likely to be so bad.

Unless, of course, you’re giddy about the stock market. Investor sentiment, as measured by the American Association of Individual Investors, is “unusually high,” and that’s normally a contrarian indicator, as investors tend to pay for euphoria by having their guts ripped out.

Read: These 7 momentum stocks ignited the market. Look out when they start to fall.

While Welsh noted that “the market deals better with a rolling recession than a broad-based, classic recession,” stock market declines of 7% to 10% would be enough to convince investors that, indeed, recession is here.

“Don’t be fooled,” Welsh cautioned. “There’s a lot of wishful thinking going on right now, but wishful thinking is only enough to make you think trouble’s not coming, it’s not strong enough to actually stop that trouble from showing up.”

More: A giant wealth transfer explains why the economy isn’t responding to Fed policy: Ray Dalio

Also read: ‘No chance we’re having a soft landing’: Stock-market strategist David Rosenberg gives Powell’s Fed no credit — and no mercy