The Fed’s 50 basis point cut to the target federal funds rate, bringing it to 5.0% in March 2020, marks the largest cut since the COVID-19 pandemic and signals potential economic trouble ahead.
50+ basis point cuts in the target rate have historically preceded recessions and rising unemployment within a few months, as evidenced in the late 1980s, 2001, and 2007.
Despite Fed Chairman Jerome Powell’s upbeat tone, a 50+ basis point cut is historically unusual during strong economic conditions, contradicting his statement that the economy is in “great shape.”
The August 2023 Beige Book reveals a bleak economic picture, with only 3 out of 12 Fed districts reporting growth, while 5 districts reported economic decline or slight decline.
Powell’s claim that the 50bp rate cut will lead to sustained low unemployment lacks historical precedent, as similar cuts have typically preceded recessions rather than maintaining low unemployment.
Corporate executives predict an 12-18 month earnings recession, with labor market deterioration being self-reinforcing as job cuts reach 2009 levels and hiring hits a 20-year low.
The stock market is pricing in a recession, with defensive stocks like Walmart and Costco outperforming tech and cyclicals, while the bond market signals recession through 2-year yield and Fed rate cut expectations.
BLS data shows a shift in employment patterns, with part-time jobs increasing by 142,000 while full-time jobs decreased by 438,000, pushing the underemployment ratio to 8%.
Corporate insiders have a 12-month sell-to-buy ratio over 25, signaling expectations of slowing earnings growth and economic deceleration in the next 12-24 months.
Walmart’s performance relative to luxury retailers is at a 20-year high, a reliable recession indicator as value-conscious consumers shift away from luxury spending.
Rising cost of living (2.5% YoY) is outpacing wage growth (67-25%), creating a consumption vs. income imbalance that could indicate impending recession.
Warren Buffett is holding a record amount of cash relative to his equity portfolio, taking a maximum defensive stance while still investing in select assets like Occidental Petroleum.
Chinese equities, currently the most hated asset class, are trading at extremely cheap valuations, potentially offering an interesting buy opportunity as the economy shows signs of bottoming out.
The Fed’s surprise 50-basis-point rate cut and expected future cuts create a tailwind for precious metals, with gold potentially reaching targets of $2727 or $3100.
Gold’s $2000-2400 range acts as support, with analysts advising focus on long-term trends rather than short-term volatility.
Gold stocks, particularly juniors, are underperforming despite high gold prices, but historically tend to outperform in late bull markets.
Mining companies’ conservative $1300-1400/oz gold price assumptions are hurting their economic case, with a more realistic $2000-2100/oz being reasonable.
Gold and copper hedge each other across the commodity spectrum, with gold as a monetary metal and copper as an economic indicator.
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