Recession Looming?

Share with

Share on linkedin
Share on facebook
Share on twitter

Inflation in the U.S. accelerated to 8.5% in March 2022, as compared to the same month a year ago. We have not seen inflation this high in four decades. The consumer price index (CPI), which measures the cost of goods and services across the economy, noted the biggest contributors to inflation in the last 12-months were gasoline – up 48%, used cars and trucks – up 35% and energy – up 32% as of March.i Compared to one month earlier, the price of automobiles dropped and the price of gasoline rose due to sanctions on Russia.

Economists are searching for signals that inflation is peaking. One indicator is that the monthly increase of inflation rose by only 0.3% in March from February, the slowest increase in the last six months. This was due in part to the decrease in used vehicle prices by 3.8%. Additionally, pricing pressure in the housing market also eased.ii

However, even if inflation is slowing, many analysts predict inflation will be sticky. Supply chain disruptions due to the Omicron BA.2 variant are affecting China currently and the medical community believes future variants will continue to evolve. Additionally, Russia’s invasion of Ukraine presents further supply chain issues as well as market volatility due to the unknown.

Surprisingly, the U.S. and global stock markets took a big hit during the first quarter of 2022. Nearly every investment category declined in the beginning of 2022, with the exception of commodities (oil & gas). The broadest measure of U.S. stocks, the Wilshire 5000 Total Market Index, was down 6.18% as of Q1. The S&P 500 Index of large company stocks was down 4.95%, and the tech-heavy Nasdaq Index was down 9.10% during the same period. The broad-based EAFE Index of companies in developed foreign economies also lost 6.61% in Q1. European stocks of companies most directly affected by Russia’s invasion of Ukraine were down 11.34% in the first quarter. The outlier was the commodities market which gained 29.05% in Q1 driven by rising oil and wheat prices, as measured by the S&P GSCI Index.iii

Focusing on the S&P 500 Index of U.S. large companies as a forward-looking indicator, the index opened the new year at 4,796, hit a low of 4,171 in early March, only to close out Q1 at 4,530. While the market has dipped a little in early April, many see the recovery in March as a positive sign. Although it is likely we will endure ongoing volatility, the U.S. stock market is fighting towards recovery.

At the same time, the “R” word (recession) is being whispered in what feels like a dark echoing tunnel. No one wants to say recession out loud, but many are wondering if a recession is looming. By definition, a recession is recognized as several months of economic decline, as measured by GDP (Gross Domestic Product), in conjunction with monthly indicators such as a rise in unemployment.iv

There is no evidence we are experiencing a recession currently. Economists estimate that Q1 2022 GDP will come in around 1.8%. This is below the 2021 prediction for the same period at 3.9%, but an improvement over the 0% GDP growth in December 2021 and January 2022. Additionally, the U.S. economy added 431,000 new jobs in March, following a gain of 678,000 new jobs in February. Furthermore, there appears to be more balance in the labor market, as the number of new hires as a share of overall employment averaged 4.4% in the past year – surpassing the 3.9% average hiring rate for the year before the Covid pandemic. Wages in the private sector are up 5.6% in March 2022 compared to a year prior, as well as an increase of nearly 15% in the previously Covid-crippled leisure and hospitality sector.

Another recession indicator that gets a lot of media coverage is the inverted yield curve. In a normal market, short-term bonds pay a lower return or yield in exchange for their short duration or lower risk. Conversely, long-term bonds must pay a higher return to investors in exchange for locking up investment funds for a longer period of time. In an inverted yield curve, short-term bonds offer higher rates than long-term bonds. From an investment perspective it is counter intuitive. The current yield on the 2-year Treasury note is 2.337%, where-as the yield on a 10-year note is offering 2.331%. A sound investor would not buy the higher risk long-term bond for a lower return than the preferred low risk short-term bond. As such, if the yield-curve inversion remains consistent, long-term lending could be reduced, and thus money supply could tighten. This occurrence has been seen at the start of a recession. However, this signal has been wrong in the past and is a warning sign at best. Further, the yield between the one-year and 30-year Treasuries is not inverted, and thus the current, very minor, inversion of the two to 10-year note might be a blip.

On the positive side, oil prices are below $100 a barrel again, despite the recent predictions of a possible global shortage. Additionally, U.S. corporations closed calendar year 2021 with profit margins unmatched since 1950, noting the Covid-19 economic recovery was successful. While markets will likely continue to be volatile the rest of 2022, there are equally as many compelling reasons to be positive as there are to be negative. In the short-term, the best ways to combat inflation may be to shorten bond duration, lean on value (versus growth) stocks, and re-evaluate your stock to bond weighting in your investment portfolio.

In the long-term, a diversified investment strategy has proven to weather volatility well and allow investors to capture market rates of return. Investment solutions should be personalized to each investor’s unique financial goals and tailored to your risk tolerance. Therefore, we recommend you work with a Certified Financial Planner™ who will examine your overall financial picture and incorporate the current economic and tax landscape into your customized financial plan.


i Labor Department

ii Blerina Uruci, U.S. economist at T. Rowe Price Group Inc.

iii Bob Veres Insider Information

iv National Bureau of Economic Research (NBER)

The commentary on this website reflects the personal opinions, viewpoints and analyses of Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.