In the financial world, the term “soft landing” is often used to describe a situation where the Federal Reserve (Fed) successfully increases. interest rates without causing a recession. This narrative currently dominates the market, with stocks trading at record highs and the greed fear index showing extreme greed. However, it is essential to examine the data and prepare your portfolio for the possibility that this story does not unfold as expected.
Understanding the story of the soft landing
The historical context of soft landings
The soft landing narrative is not a recent development. It was also the dominant narrative before the onset of the last two non-COVID recessions in 2000 and 2008. Despite the positive outlook, these periods were followed by severe recessions. This historical context serves as a reminder that while a soft landing is feasible, it is not guaranteed.
The role of the labor market
The main justification for the soft landing narrative is the stability of the labor market. Current data shows that unemployment is at a low point. However, a detailed examination of the history of recessions reveals a pattern: unemployment is usually at cycle lows when a recession begins. This pattern has remained consistent for the past 11 recessions.
Signs of weakening in labor statistics
While low unemployment rates could mean a strong economy, other labor statistics suggest possible weakening. Employers often cut their employees' hours before using layoffs during a recession. CURRENT show working hours trends a worrying decline, which could be an early warning sign of an impending recession.
Employment as a lagging economic indicator
Employment is often seen as a delay economic indicator, which means that it tends to change as the economy as a whole has already begun to follow a specific trend. Average monthly job growth for the four quarters leading up to a recession is typically strong. Job losses don't happen until the recession starts, and when they do, they can be severe.
Market behavior and recession probability
Despite possible warning signs, the market is currently acting like there is no chance of a recession. Stocks are at record highs and the fear greed index shows extreme greed. However, history shows that in the last ten recessions, stocks have fallen an average of 31.5%.
Building protection into your portfolio
This analysis is not intended to instill fear or predict an inevitable recession. Instead, it serves as a reminder to be smart and proactive managing your investments. Including some hedging in your portfolio can help protect your assets in case the soft landing story does not materialize as expected. This may include diversifying your investments, keeping a portion of your portfolio in safer assets, or seeking professional advice to help navigate the potential market downturns.
Frequently asked questions
Q. What is the story of the “soft landing”?
In the financial world, the term “soft landing” is often used to describe a situation where the Federal Reserve (Fed) successfully raises interest rates without causing a recession. This narrative currently dominates the market, with stocks trading at record highs and the greed fear index showing extreme greed.
Q. What is the historical context of soft landings?
The soft landing narrative is not a recent development. It was also the dominant narrative before the last two non-COVID recessions in 2000 and 2008. Despite the positive outlook, these periods were followed by severe recessions. This historical context serves as a reminder that while a soft landing is feasible, it is not guaranteed.
Q. What role does the labor market play in the soft landing narrative?
The main justification for the soft landing narrative is the stability of the labor market. Current data shows that unemployment is at a low point. However, a detailed examination of the history of recessions reveals a pattern: unemployment is usually at cycle lows when a recession begins. This pattern has remained consistent for the past 11 recessions.
Q. Are there signs of weakening in labor statistics?
While low unemployment rates may mean a strong economy, other labor statistics suggest possible weakening. Employers often cut their employees' hours before using layoffs during a recession. Current trends in working hours show a worrying decline, which could be an early warning sign of an impending recession.
Q. How is employment viewed as an economic indicator?
Employment is often seen as a lagging economic indicator, meaning that it tends to change after the economy as a whole has already begun to follow a specific trend. Average monthly job growth for the four quarters leading up to a recession is typically strong. Job losses don't happen until the recession starts, and when they do, they can be severe.
Q. How is the market reacting to the possibility of a recession?
Despite possible warning signs, the market is behaving as if a recession is impossible. Stocks are at record highs and the fear greed index shows extreme greed. However, history shows that stocks have averaged a 31.5% decline in the last ten recessions.
Q. How can I protect my wallet?
Incorporating hedging into your portfolio can help protect your assets if the soft-down scenario doesn't materialize as expected. This may include diversifying your investments, keeping a portion of your portfolio in safer assets, or seeking professional advice to help navigate potential market downturns.
Post Decoding the “Soft Landing” Financial Narrative. appeared first on Because.