Are We in a Recession?

The mere notion of potentially being in a recession is enough to strike fear into politicians and households alike. An economic time period that has historically been corrected by declaring war and putting the Federal Reserve in a position of power to restore balance within the money supply. Being tossed around more frequently as this historic bull market slowly loses steam, there is a lot of noise that is causing undue worry and stress in our everyday lives. So the elephant in the room is: should we worry? Better yet, how can we best prepare?

While there are myriad indicators that predict the full spectrum of economic futures, the truth is, while we can get a general idea of where the economy is heading at best, anyone who claims the sky is falling is probably the least likely to know what is going to happen.

There has yet to be a bull market that lasts for eternity, and when there is, we promise to jump in before it takes off. As the stock market has trickled downward slowly in the last few months, many people have begun asking the tough questions, as they should. We have primarily seen two; one stirred by recent media coverage and the other vastly more important. Are we in a recession? And better yet, how will this affect me?

Up until recently, there were no questions asked in regard to what the definition of a recession was. The status quo was always that two negative quarters of GDP growth was the technical term for the beginning of a recession. Someway, somehow, this year there became a delusion that the party is still on and that we are not already in a recession. To recap, year to date we have seen large mega-cap stocks fall 20% or more on worries of bloated inventory, advertising spending has dropped dramatically, companies are laying off workers in droves with some business news outlets that over half of all U.S. corporations having auxiliary plans of culling their own workforce, and lastly, we reported two negative quarters of negative GDP.

Some keep touting that the unemployment rate remains at low levels and therefore indicates a lack of pure recession. But, it is not only the number of people employed but also the quality of employment which ensures an escape from contractionary periods. The recent rise of gig work has artificially supported the reported unemployment figures without breaking out this data separately from the whole. If you were to lose your job tomorrow, pick up gig work and make $20, once a week via your favorite ride-hailing app, you would be counted as employed according to the Bureau of Labor Statistics. Therefore, given the previous data, the reliance on unemployment statistics that present faulty representation as the recessional indicator of choice has the potential to be somewhat broken until the reporting methods change. Given this, in our opinion, we are now no doubt in recession, however, where we are within the decline, and how deep the decline will be, is a better question worth asking.

Moving forward to how this affects everyone, in Virtue’s opinion, based on our best research and estimates, we are prepared for a slowdown in growth and reductions in overall markets. We believe that the U.S. economy is resilient as ever, and are confident that drops in equities will be relatively short-term. It seems as though within the next 1-3 years, we will experience a correction in stocks and real estate, prompted by the federal reserve's reduction of interest rates once inflation has been tamed.

Portfolio-wise, the long-term outlook of the economy is still favorable for investors. Virtue is confident in the businesses that we have invested in as they have historically been able to navigate recessions and challenges with ease. An excellent example is Sprouts Farmer’s Market, whose supply chain procedures have been able to mitigate issues that have plagued other grocers, and whose business model has the opportunity to pass costs to consumers easily should inflation remain rampant. We see wonderful opportunities slowly starting to surface, even in the event of a recession. If we look at historical trends, recessions have created a plethora of buying opportunities. We will be thrilled if the bear market continues, and we will patiently wait if it does not. As always, thank you for the opportunity to grow your wealth together.

Warmly,

Zach Terpstra

Principal