If the recession now underway was a “normal” contraction, the near-term investment outlook might look quite a bit better. More than a year into the downturn (as we are now) might seem like a good time to start buying in anticipation of the rebound. But this isn’t your garden variety downturn, and so economic and financial metrics remain under a suspicious cloud even when they’re looking bullish.
That includes our proprietary economic indices that track the general trend for the U.S. As the chart below suggests, in theory there’s reason to be bullish about the next several quarters. In practice, however, playing defense is still recommended.
As we discussed last month, the Federal Reserve’s printing money faster than at anytime in recent memory, perhaps more so than at any other time since the institution was founded in 1913. The massive liquidity injections are, of course, registering loud and clear in our economic measures, particularly for the leading index, which looks ahead by 6 to 12 months. So it goes when the effective Fed funds rate has continuously remained under 1% since October, and under 0.5% since early December. Currently, it’s hovering in the ~0.2% range.
Typically, such an easy monetary policy would be working its usual magic by juicing the economy. But not this time, at least not yet, which speaks to the magnitude of the economic headwinds currently blowing through these United States. Virtually all of the fundamental economic metrics in our index—i.e., industrial production, commercial and industrial loans, employment, etc.—are still falling. As a result, the incredibly strong rebound in the leading index in the chart above must be seen for what it is: a reflection of monetary policy that’s in overdrive but not yet producing stabilization, much less growth, in the wider economy.
Alas, this morning’s update on weekly jobless claims suggests the contraction is still gaining momentum. New filings for unemployment benefits—a forward-looking economic signal—surged again last week to a seasonally adjusted 626,000—the first time claims rose above 600,000 since a brief spike north of that mark since the early 1980s.
History tells us that initial claims tend to surge higher in one final, dramatic rise, followed soon after by a robust decline and then some backing and filling as the worst of the initial claims trend passes. At that point, one could reasonably say that the recessionary momentum has ebbed, even if the aftershock rolls on for some time afterward.
Of course, such a peak is only obvious in hindsight. In the meantime, there’s plenty of room for speculation about whether the current surge above 600,000 last week marks the peak. For what it’s worth, we expect even higher levels of jobless claims.
That said, it’s clear that the Fed’s efforts are in overdrive to quickly get to the other side of the peak. Congress is now lending a hand, too.
Yes, the glorious day of a peak in initial jobless claims is coming, but it’s not here yet.