Markets are Mistakenly Pricing In A Recession For the US Economy

…Recessions are as much about psychology as they are about economics, because we can talk ourselves into one if we create enough anxiety and trepidation and market pundits are doing their best to accomplish this right now by conflating the carnage that is going on in financial markets with activity in the real economy. While economic activity is clearly slowing from the unsustainable stimulus-induced pace that followed the economic reopening, it is not contracting the way risk assets prices have so far this year. The market is not the economy. [Let me explain.]

This version of the original article by Lawrence Fuller has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

…Recessions are healthy and necessary events that rid the economy of the excesses built up from the expansion that preceded it. I don’t see a lot of excesses in the real economy today other than the surplus of job openings and savings. We have an excess of prices, but that is mostly due to a lack of capacity and supply.

Bear markets rid the financial system of excesses built up during a bull market…[as] seen from the collapse in crypto and the most expensive stocks and sectors in the market, and we have largely expunged those excesses. I think we are closer to the end of this process than the beginning because investors are finally selling the good, the bad, and everything in between. Over the past few days they are selling everything, as evidenced by the fact that only 12 stocks out of the 500 that comprise the S&P 500 index rose in price yesterday.

…[The 2 charts below]…give us some perspective on how deeply oversold the market is today. The first is the percentage of stocks on the Nasdaq Composite that are trading above their 200-day moving averages. Outside of the Great Recession, it has fallen to levels that coincided with bottoms over the past 20 years.

Another extreme can be seen in the percentage of stocks in the S&P 500 that are trading above their 50-day moving averages, which is now down to 2% and also consistent with previous bottoms.

These indicators don’t mean that the major market averages will not fall lower, but they do suggest that we are much closer to a bottom than the beginning of something far worse.

The markets are now pricing in a recession for the U.S. economy this year, but it isn’t in the numbers as of yet. We are not seeing a slew of corporate earnings warnings either, and the end of the second quarter is less than two weeks away. Regardless, investors are so concerned about recession that they are selling the stocks of the highest quality companies at very inexpensive valuations. That makes no sense.