Taps Coogan – June 14th, 2022

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Roughly one month ago, we noted that if markets didn’t bounce we feared that we’d fall into a recession this Summer:

The S&P 500 is down 18.57% from its high at the time of writing, slightly above the low of -19.92% made roughly a week ago. Since 1950, there has only been one time when the S&P 500 has declined more than 24% from a local high that did not occur in the immediate run-up to a recession or during one. That single example is 1987, a cliff-edge crash with few parallels to today. There have only been two further examples of the market declining roughly 22% outside those parameters: 1998 and 1966. In other words, we’ve got room for a couple more bad days like yesterday, but beyond that and 1987, every time the market has been down more, it’s because we were imminently entering a recession or already in one.

Fast forward a month and the S&P 500 is down 20.76% from its high (at the time of writing). The market bounced for a few days after we wrote the paragraph above. It then stalled out for a couple weeks and has now rolled over to new lows. 

Other than the yield curve, the market itself is perhaps the best leading indicator of a recession. If the S&P 500 is down more than 20%, chances are high that you’re entering a recession or already in one.

Meanwhile, the Fed is touting the strength of the labor market as justification that they have space for accelerating the tightening. One of the first articles we ever published here at The Sounding Line was an attempt to show the folly of using the labor market as a forecasting tool. As we noted then:

“Since 1950, without exception, any significant worsening of unemployment… has happened after a recession has been declared, never before… The average time between the maximum low in unemployment and the next declaration of recession is 3.8 months, the maximum is 10 months, less than a year. Three times since 1950 (’57, ’73, ’90) a low in unemployment has been followed by recession and an explosion in unemployment in less than one month.”

Here is a rule of thumb: Don’t invoke the strength of the labor market in forward looking statements. 

Having ‘printed’ nearly $1.5 trillion after PCE core inflation exceeded its target, and with last week’s inflation numbers exceeding expectations for the nth time in a row, the Fed is likely to try and prove that it can be really, really hawkish on Wednesday. The Fed probably thinks that the only way to bring stability to the economy and markets is to get inflation under control as fast as possible.

Nothing good ever comes when the Fed rushes monetary tightening as recession warnings go off.

If you had polled us over the past decade, the overwhelming majority of the time we would have recommended a tighter monetary stance than what the Fed delivered. The only real exception was in late 2018 when we warned:

“While the Fed’s belated desire to normalize policy is commendable, aggressively tightening monetary policy when financial markets are on pace for their worst year since 2008, and when recession indicators are starting to flash red …would kneecap the pro-growth reform initiative in the US (and) undermine the Fed’s ability to continue to tighten”

Like in late 2018, the Fed needs to prioritize the longevity of this tightening cycle lest they be forced to entirely halt the tightening campaign before bringing inflation under control. 

So here is Taps Coogan’s sincere advice to Chairman Powell and the FOMC at this week’s meeting: Do a triple rate hike for June, but pare back the triple rate hike rumors for July, August, and September into double or, preferably, single hikes until enough time has passed to assess the effects of tightening. Reduce the $95 billion-a-month target for QT to something more achievable. 

We must end the cycle of badly-belated-then-overly-aggressive tightening campaigns that end in a crash and then more accommodative policy. 

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