Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton
Aug 28, 2023
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Mike Singleton, an expert in business cycles and economic downturns, discusses various topics including the forthcoming recession, the best time to buy bonds, and the potential causes of an imminent economic downturn. The conversation also explores the correlation between credit spreads and the bond market, the composite PMI and its relationship with manufacturing and services, and the potential impacts of different economic policies on growth.
Accurate forecasting and analysis of macroeconomic variables can enhance investment decisions.
Understanding the relationship between the business cycle and asset classes helps optimize portfolio returns.
Higher unemployment rates lead to decreased consumer spending, impacting both goods and services sectors.
Deep dives
Importance of Analyzing Macro and Business Cycle
Analyzing macroeconomic factors and the business cycle is crucial for understanding market dynamics. It is essential to consider variables such as real growth, inflation, and monetary policy, as they drive the price action of major asset classes. While forecasting these variables can be challenging, they play a significant role in determining market trends. Understanding the impact of macroeconomic circumstances allows for more informed investment decisions and can enhance bottom-up stock picking skills.
Significance of Macroeconomic Variables in Driving Markets
Real growth, inflation, and monetary policy are key macroeconomic variables that have a substantial impact on market behavior. These variables determine the price action of various asset classes, including stocks, bonds, commodities, and currencies. By accurately forecasting and analyzing these variables, investors can make well-informed decisions and increase the likelihood of successful outcomes in their investments.
Understanding the Business Cycle and Market Regimes
The business cycle and market regimes heavily influence market performance. Economic conditions, such as the business cycle, can drive or hinder market growth and affect various sectors differently. Evaluating indicators like home sales, manufacturing data, and employment rates provides insights into market trends and potential recessions. Recognizing the stages of the business cycle and understanding how macroeconomic factors interact with market behavior can guide asset allocation and investment strategies.
Assessing the Impact of the Business Cycle on Stocks and Bonds
The business cycle plays a significant role in the performance of stocks and bonds. During periods of economic expansion, when growth is strong and inflation is low, stocks tend to outperform. Conversely, during economic contractions and recessions, stocks may face challenges, and bonds become a more favorable investment due to decreasing interest rates. Analyzing the business cycle and understanding the relationship between macroeconomic factors and asset classes can inform investment decisions and help position portfolios for optimal returns.
Higher unemployment can lead to decreased spending
One key insight from the podcast is that higher unemployment rates can result in lower spending. As the unemployment rate goes up, wage growth declines, leading to negative growth in incomes. This decrease in income directly affects consumer spending, as people have less money available to spend. This impact is not limited to spending on goods but extends to spending on services as well. The podcast highlights the importance of monitoring the labor market, particularly manufacturing payrolls, as layoffs in these industries can indicate broader weakness in the labor market and potential economic downturn.
Expectations of declining corporate profits and impact on the stock market
The podcast discusses the outlook for declining corporate profits, which is seen as a distinctive feature of a business cycle transition or recession. Historically, corporate profits have seen a drawdown of approximately 25-30% from peak during economic downturns, and currently, they are about 12% off their peak levels. The podcast suggests that a further decline in corporate profits of around 20% may occur, potentially pushing the stock market into a downturn. The timing and severity of this decline are influenced by factors such as manufacturing layoffs, corporate margins, and interest rates. While a rallying stock market may temporarily delay layoffs as companies attempt to maintain profitability, the fundamental drivers, such as declining margins and profits, are likely to outweigh short-term stock market performance.
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Timecodes:
(00:00) Introduction
(00:19) Singleton's Macro Process
(12:47) The Excess Savings Debate
(17:06) U.S. Economy Headed For Severe Recession In 2023
(19:19) The Best Time To Buy Bonds
(24:06) Unemployment Rate To Go As High As 7%
(48:52) The Spending Boom
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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