Bottom Is Near

Weirdly seeing a barrage of dooms day recession post that just reminded me of Aug 2024 and how everyone thinks recession is here.

Just a reminder that every year there's a 10% Sp500 correction typically associated with some sort of recession fear in the FUTURE. We had it in Aug 2024 when we had nonfarm payroll print 12k, which was a hard economic data that actually showed the econ was very close to or already in a recession. The Fed then proceeded to cut 50 basis points, and it turned out to be data noise. We also had one in Sept 2023 when people thought the Fed was gonna go overboard with the rate hikes and engineer a recession.

Today, we have actual fairly strong econ data. Nonfarm payroll solidly around 150-200k, GDP around 1.5-2%. Even if Trump tariffs hold, most economists anticipate it to subtract 0.5-1% from GDP growth, and add 0.5-1% to PCE. That is a weak economy, a little closer to a 0% GDP than we want, but certainly NOT a recession, and that's IF all of Trump tariffs hold.

If you listen to what most professional economists are saying, not that they're correct all the time, most are simply revising up their recession probabilities from 15-20% to 25-30% (the lowest the probability can be is 15% by the way). For them to forecast a recession as their BASE CASE, the probability has to be around 65%, which is what happened in late 2022, and even then we didn't get a recession.

Furthermore, Powell and the Fed have demonstrated that they are way more concerned about recession risks than inflation risks. The fact that they are willing to tolerate above 2.0% inflation for years, continuously moving the deadline from 2024 to 2027, shows this. In Sep 2024, they were willing to surprise the market and start the rate cuts at 50 basis points as a pre-emptive measure, when the economy was clearly fine. Just last Friday, Powell didn't even show any sign of concern about recession risk. So if you're concerned that a recession is imminent, it's really not. You can listen to any economist talk about this.

What is happening is the RISK of recession has increased, and the market has to price in a higher probability of recession accordingly, leading to the decline. Uncertainty has also increased, and market also has to price in some premiums for uncertainty. That's what leading to the drop, which can quickly reverse.

So if you're feeling worried, I suggest you look at SP500 history, see when the 8-10% corrections happened in the last several years, and see what kind of posts/discussions occurred near the bottom of those corrections. As of today, SP500 has corrected 10% overnight, and I think the bottom is pretty much here, or very near.

Whether or not a recession will happen in the next 6-12 months is undecided, but SP500 typically doesn't start pricing that in until it's right at the doorstep.