A Look Back
Although originally written and recorded in 1939, the song “The Lion Sleeps Tonight” was made famous by the doo-wop group, The Tokens in their 1961 version. It rocketed to #1 on the Billboard charts and went on to earn millions in royalties from cover versions and film licensing. My oldest son made a playlist for me at a recent birthday party and that song made the list. As I thought about current markets, that song stuck with me. Perhaps the sleeping lion is the potential recession that pundits and media outlets have been talking about and warning against for what seems like forever. There has been a sense that the aggressive rate-hiking path from the Fed in their attempt to tame inflation would have to lead to a recession. Eventually it would slow growth, reduce spending, increase debt-financing…all of the things that we would historically associate with a recession. Well, the Goldilocks scenario of a soft landing, or no-landing as some are describing it with the economy, is still out there as a potential outcome. The one big factor that really has not turned yet is the overall employment situation in the U.S. Unemployment has remained stubbornly low and job creation continues to roll along. Employers added 339,000 jobs in May versus economists’ expectations of 190,000. The actual unemployment rate did tick up from 3.4% to 3.7%...but it’s still 3.7%, which is not a level that anyone would normally associate with an impending recession. In fact, the unemployment level is one of many factors that the NBER (National Bureau of Economic Research) looks at when officially declaring a recession. Something has to give. To be fair, the jobs outlook can change quickly. We saw that in the Great Recession timeframe of 2008-2009, where it jumped from 4.4% in March of 2007 to 10% by October 2009…and remained above 9% all the way through October 2011. The soft-landing camp is banking on those numbers to remain positive. We shall see.
In the meantime, most asset classes took a breather in May. The S&P 500 was up only .43%, while all of the other major stock benchmarks were negative. Core bonds took a step backwards as well, slipping over 1% in the month, but still up 2.46% in 2023. Nonetheless, with the big-cap S&P 500 up nearly 10% and core bonds adding positive numbers, most investors would have taken those 5-month returns for the full year at the start of the year with all of the economic and geo-political uncertainty.
A Look Ahead
The crystal ball is getting worn out lately because everyone really wants to know what the future might bring. With all the uncertainties out there (aggressive Fed, still higher-than desired inflation, commercial real estate concerns, nagging banking issues, and the prolonged Russia/Ukraine war to name a few), what do you make of the financial markets? We believe it is especially true now to be cognizant of and reaffirm your overall risk appetite and be true to a diversified asset allocation approach. Old sayings stick around for a reason…like: asset class outperformance eventually leads to underperformance and vice versa. Don’t get too high on the highs or too low on the lows. Take advantage of what markets give you, etc. Currently, we believe there is still a better than 50-50 chance of a recession later this year or early next year. We also believe it shouldn’t be feared. It is, and has been part of the economic cycle for hundreds of years. We remain somewhat cautious on stocks, and are favorable on core bonds and cash…and are also okay with the lion sleeping for now...