Well it’s official, kinda: The U.S. seems like it’s in a recession. 

The U.S. GDP fell 0.9% in the second quarter of 2022, following a 1.6% decline in the first quarter.

For folks who took 38 seconds to Google “what is a recession,” you might have come up with this answer:

“A recession is a significant, widespread, and prolonged downturn in economic activity. Because recessions often last six months or more, one popular rule of thumb is that two consecutive quarters of decline in a country's Gross Domestic Product (GDP) constitute a recession.”

So that’s it then. 

Two quarters. Six months of consecutive decline. We’re officially in a recession. 

Or… are we? 

Cue the Vsauce music. 

Now, for folks who have been reading these dispatches for a while, you might recall this bit from my piece, “Is There a Recession Coming in 2022?”:

When the economy doesn’t grow for whatever reason, and it declines for at least six months (two quarters), it’s called a “recession.” 

Now, notice how a recession doesn’t cause jobs and money and stuff to disappear. 

Recessions are labeled during or after an extended economic decline. 

First the decline happens. Then somebody (NBER, probably) comes in and goes, “Whoa, yeah, uh… that thing that just happened was totally a recession.”

Now, if this feels subjective, problematic, and even stupid…

Remember the recession in 2008 that was so big and awesome they called it great? 

Well, it took NBER until December 2008 to declare that the U.S. had been in a recession since January 2008. 

Consider that for a moment. 

It took 11 months for economists and experts to look out the window, look at everything grinding to a halt during one of the greatest financial catastrophes of all time, lick their finger to test the air, and say, “Oh yeah, we’re in a recession.”

That’s why we’re getting CNBC articles with headlines like: “The economy may look like it’s in recession, but we still don’t know for sure.”

It is entirely possible that, by year’s end or later, NBER will wake up, rub the sleep from their eyes, and go:

“Oh yeah, that wasn’t a transitory economic slowdown. It was a recession. Woopsie doopsie.”

It’s the confusing, subjective nature of the economy that has some experts, like economist and former U.S. treasury secretary Larry Summers, claiming that a recession is “almost inevitable”… 

While at the same time you have the other experts, like economist and current treasury secretary Janet Yellen, claiming that the economy is “showing no signs of a recession.” 

Here’s what I want to do once and for all…

I’m going to beat the NBER to the call and declare whether or not we’re in or heading into a recession, once and for all. 

What are my qualifications? 

I don’t know. I have, like… a subscription to the Financial Times. That’s got to count for something. 

Ok…

Are you ready for the ultimate showdown?

THE RECESSIONISTAS VERSUS THE CANDIDES

Let’s start with The Recessionistas, because it looks like they came ready to rumble. 

In this corner, we have a tenuous consortium of perma-bears, bag holders, and the generally cautious. 

Here are their arguments that we are in or entering a recession:

1. Retail sales and consumer spending (which constitutes two-thirds of the U.S. economy) have been slow or falling in recent months. 

2. Consumer confidence recently hit the lowest level ever recorded, with nearly half of survey respondents in the U.S. saying that inflation is eroding their standard of living.  

3. Mortgage loan interest rates are rapidly rising due to higher central bank interest rates, which is causing a slowdown in demand for homes and home construction. 

4. Startup funding for new businesses dropped 23%, to the lowest level since 2019. 

5. The S&P 500 had its worst first half of a year since 1970. Every sector of the market except energy is down from the beginning of the year. 

6. Copper prices are down more than 20% since January. This is important because copper can be used to measure the sentiment of businesses in the economy because of its use for buildings, cars, and electronics. 

7. Oil and gas prices have soared this year, making inflation worse since oil and gas prices directly impact energy costs, which ultimately impact the cost required to make or transport literally every other product made by every other business in the world. 

8. Auto loan delinquencies have spiked and are increasing steadily. This is generally a sign that there’s economic trouble ahead, because when people do not have enough money, car loans are typically the first bill that people stop paying. 

9. Yields have inverted, which means that long-term interest rates in government bonds have fallen below short-term rates. This suggests that big institutional investors are expecting an economic slowdown.  (This event has preceded every recession in U.S. history.)

10. The actual cost of paying our sovereign debt seems to have spiked to an unsustainably high level, and this has always preceded or marked the beginning of a recession for the last 45 years.

Wow. Haymaker after haymaker. 

That’s a lot of bad news, all seeming to point toward the U.S. running face first into a recession. 

So let’s turn our attention now to this corner where we have the cautiously optimistic, the deluded, and those motivated to push a particular narrative.

They better bring their A-game, because the odds seem stacked against them.

Here’s why The Candides say we’re NOT in or inevitably entering a recession:

1. The U.S. economy is not really experiencing job losses like we would normally expect in the leadup to a recession. 

A recent government survey showed that nonfarm payrolls increased by 372,000 jobs in June. It was the fourth straight month of job gains in excess of 350,000 and left employment 524,000 jobs below its pre-pandemic level. The private sector has recouped all the jobs lost during the COVID-19 pandemic and employment is 140,000 higher than in February 2020. 

If the U.S. does go into a recession, this would be the first recession ever not to trigger a spike in unemployment. 

As the economist Noah Williams recently stated: “If the U.S. economy is in or about to enter a recession, it would be a recession of a vastly different nature than that of other historical downturns. Recessions have largely been characterized by declines in employment, typically starting with slowed hiring by businesses. Such slowing has yet to happen on a broad scale.” 

2. Corporate profits are still coming in higher than expected. In fact, so far 68% of S&P 500 companies have reported a positive EPS surprise and 65% of S&P 500 companies have reported a positive revenue surprise. 

3. (And this is REALLY stretching it here…) The aspects of the economy that declined had less to do with “real” economic activity and more to do with decreased government spending as well as the way inventories and trade figure in the GDP calculation.

And… that’s it. 

Those were the best arguments I could find claiming that we are not going into a recession.

Sorry, I have to stop the fight. 

This isn’t even fair. 

I haven’t seen a beating like this since Jorge Masvidal kissed Ben Askren’s face with a flying knee.

But all this recession talk raises a simple question:

How Will This Affect Investors Like You?

This GDP decline news comes after a slate of news that one could more or less call “bad” or, at the very least, "double-plus ungood."

The Federal Reserve raised rates by 0.75%, lifting the rate to a target of 2.25%-2.5% (which is higher than I anticipated).

The central bank slightly downgraded its view of the economy, noting that "spending and production have softened." But "job gains have been robust" while "inflation remains elevated."

Inflation numbers came in hotter than “Zoe,” the world’s first named Heat Wave that’s been prompting you to run air conditioners and melting tarmacs in England.

But despite all this bad news…

Well…

So far the markets seem to be responding with a collective, “Oh. Nice.”

June was a horrible month for stocks…

Yet, as we’ve been getting bombarded with what is apparently a relentless onslaught of horrible economic news…

The markets have held stable and have even been making strong gains.

Why? 

I can describe what we’re experiencing and what’s going on in the economy and stock market with a single word:

“Crosscurrents”

I actually first heard this word describing the economy during a recent conversation I had with the famous former hedge fund manager Whitney Tilson. 

A literal crosscurrent involves flows of water that run across or counter to the main flow of a river. The word is now usually used to describe a social situation with many confusing or contradictory movements, trends, or tendencies. 

It’s these crosscurrents that have been causing confusion and uncertainty in the markets…

And if it’s two things the stock market hates, it’s confusion and uncertainty.

In fact, more so than inflation, central bank interest rates, supply chain issues, the war in Ukraine, or the deceleration of China’s economy…

The real reason we’re in a bear market right now is probably due to the uncertainty and confusion caused by everything above. 

That’s why whenever investors have been getting “bad news,” the markets have had at least a temporary move upward…

Because even “bad news” resolves some of the uncertainty that investors are facing right now. 

Just consider this bizarre, seemingly contradictory discovery from Factset: 

“Companies that have reported positive earnings surprises for Q2 2022 have seen an average price increase of +2.2% two days before the earnings release through two days after the earnings release. This percentage increase is above the 5- year average price increase of +0.8% during this same window for companies reporting positive earnings surprises. Companies that have reported negative earnings surprises for Q2 2022 have seen an average price increase of +2.0% two days before the earnings release through two days after the earnings. This percentage increase is well above the 5- year average price decrease of -2.4% during this same window for companies reporting negative earnings surprises.”

In other words, even when companies have been reporting bad news in 2022, stocks have been popping higher. 

It's almost like a bandaid being ripped off...

Painful as we're going through it. But once we feel the damage, we realize it's not so bad.

But it’s these crosscurrents that have led my attitude to be fairly nonchalant in the midst of all this economic turmoil…

Because the formula for doing well or, at the very least, holding on in times like these is pretty straightforward and simple: 

Buy stocks that are doing well financially, pay a dividend, and look like they’ll survive the downturn.

Then just… steadily buy more of them.

That’s what I’ve been doing through this whole mess… 

And that’s what I’ll keep doing…

And that’s what I recommend you do too.