By Michael Brush
A so-called hard landing of the U.S. economy is not going to happen. It’s a false fear. We may have a bumpy landing, but the odds of hard landing — a possible recession — are low for the reasons below.
If I am right, it confirms what extremely negative sentiment is already telling us: Stocks are a buy.
I also suggest several stocks, below, that artificial intelligence tells us may be among the best performers, as investors figure out recession risk is low.
1. The economy is strong
That 1.4% first-quarter GDP contraction is pretty misleading. It was caused by a drop in federal spending and a big increase in the trade deficit. Two more meaningful measures show decent economic strength, says Ed Yardeni of Yardeni Research. He cites the 3.7% increase in final sales to private domestic buyers. Real personal consumption spending also rose to a record.
We see signs of global strength, too. Excluding China, global services and industry purchasing managers indices came in at around 55 for April. Below 50 signals economic weakness, so this is a decent reading.
“The global economy is weathering the near-term headwinds relatively well,” say economists at JPMorgan. They expect 2% global GDP growth in the second quarter.
2. The yield curve is not predicting a recession
The yield curve is the gap between various short-term and long-term interest rates in the bond market. This trusty recession forecaster is pretty darn good. Right now, the yield curve is sloping upward. This means it isn’t predicting a recession. “We expect that the Fed may well be able to avoid a hard landing,” says John Stoltzfus, the chief investment strategist at Oppenheimer Asset Management “That said, a bumpy landing is not out of the question.”
3. Companies are guiding up, not down
Companies are the economy. Top managers continue to expect growth. We know this because they are guiding future earnings higher. Second-quarter earnings guidance is slightly above the long-term trend, says Credit Suisse.
4. The household sector is strong
Typically, economies are vulnerable to recessions when households borrow too much money, then get into trouble because they cannot pay it back. That’s not the case now.
People socked away a lot of money during the pandemic. So, households had a surplus worth 3.6% of GDP in late 2021, compared to an average of 2.8% over 1985-2019, note Goldman Sachs economists. “The household sector is on particularly strong footing,” says Goldman economist Jan Hatzius. “Soft landings are more common when private sector financial balances are healthy.”
5. Companies are cash-rich
Cash holdings increased substantially during the pandemic at businesses small and large. Importantly, this also happened at riskier junk bond issuers. These are the ones that blow up when interest rates rise, causing recessions by spreading damage to business partners and banks. “Refinancing risk and vulnerability to higher interest rates is low because most high-yield issuers already refinanced at favorable rates,” says Hatzius. Corporate profit margins also remain close to record-high levels.
“The conditions likely to undermine the expansion are not yet established,” agree economists at JPMorgan. “The private sector is in remarkably good health. Balance sheets are flush with cash.”