It’s an ‘upside down’ recession and here’s what it means for the market

It’s work Friday. The release of the monthly US Non-Farm Payrolls report is always a highlight for Wall Street, particularly in an uncertain monetary policy environment when traders are hypersensitive to factors affecting the Fed’s thinking.

In fact, the resilience of the labor market is causing many market watchers to say that, despite suffering two consecutive quarters of contraction, the US economy is not really in a ‘proper’ recession.

These recession deniers are wrong, argues Dhaval Joshi, chief strategist at Counterpoint at BCA Research in his latest note. It’s it is a recession, albeit a ‘reverse’ one! Why? Because real labor costs are falling.

Companies lay off staff when they need to protect profits, he explains. In the past, when nominal sales fell relative to wages, unemployment always rose.

But during a recession in which nominal sales aren’t falling relative to wages, profits remain resilient, and so companies don’t need to cut labor costs. This is happening now.

“In the topsy-turvy recession of 2022, there has been much higher inflation in consumer prices and nominal sales than in nominal wages. The result is that real wages have collapsed, profits have remained resilient, and companies have not needed to lay off workers…until now,” says Joshi.

Source: BCA Research

Consequently, this recession is fairer, Joshi reckons.

“In a typical recession, the pain falls on the minority of workers who lose their jobs, as well as on the profits. Paradoxically, for the majority who keep their jobs, real wages rise. This is because sticky wage inflation tends to outlast collapsing price inflation.

However, in the current recession, real wages have fallen by 4%, “which means that the pain of the recession has fallen on all of us… This is confirmed by the current malaise that is characterized not as a ‘ jobs crisis’, but as a ‘cost of living crisis’.

So what happens next? Keep an eye on consumer price inflation and company sales. Once corporate revenue growth begins to fall below stiffer wage growth, profits will decline and managers will look to cut the workforce.

“If inflation slows down, then the current ‘cost of living crisis’ will persist, hitting everyone’s real incomes. But if inflation falls rapidly while wage inflation remains stagnant, companies will be forced to lay off workers to protect profits, turning the ‘cost of living crisis’ into a ‘jobs crisis,’” says Joshi.

And what are the conclusions for investors? Well, in any scenario, consumer spending, particularly on goods, will be reduced. Housing investment will continue to contract until mortgage rates drop significantly.

“This double choke on growth is likely to keep a damper on ultra-long bond yields, even if central banks need to raise short-term rates more than expected to quell inflation,” says Joshi.

“For the stock market, this suggests that the valuation bear market is over, but that ‘cyclical value’ sectors are now vulnerable to earnings downgrades. So stock investors should stick to ‘defensive growth,’ specifically in health care and biotech,” he concludes.

markets

Equity markets generally calm as traders await US S&P 500 futures ES00 payroll data,
+0.16%
are up just 0.1% at 4,157 and Nasdaq 100 NQ00 futures,
+0.07%
they are adding 0.1% to 13,330. Meanwhile, the DXY dollar index,
+0.20%
is up 0.3% at 105.96 and the 10-year US Treasury yield TMUBMUSD10Y,
2,786%
it is down less than 1 basis point to 2.696%. Crude oil WTI CL.1,
+0.38%
rose 0.6% to $89.08 a barrel, GC00 gold,
-0.12%
is down 0.2% at $1,802 an ounce and Bitcoin BTCUSD,
+3.26%
it is advancing 2.8% to $23,149.

The buzz

The main focus for Friday is the latest US Non-Farm Payrolls data. Economists forecast of 250,000 jobs added in Julycompared to 372,000 in the previous month and that average revenue growth was stable at 0.3%.

You only get one chance to make a first impression. Record a fault, then, for Warner Bros. Discovery WBD,
+4.61%,
whose shares fell 10.6% before the opening bell after revenue expectations are missing by about $2 billion in his first earnings update on Thursday night.

tesla Tesla,
+0.40%
shareholders have agreed another stock split – shares, sensibly enough, go ‘meh’! Meanwhile, Elon Musk has counter-defendant twitter twtr,
+0.15%
as the latest chapter of “Billionaire Buyer Remorse” unfolds.

Shares in meme-stock dear AMC Entertainment AMC,
+2.47%
are down 8.6% in premarket trading after the group said it would issue a special dividend in the form of preferred shares of ‘Ape’.

A quieter day for earnings includes Western Digital WDC,
+1.05%
and Draft Kings DKNG,
-2.73%.

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The graphic

More than 80% of S&P 500 companies have now reported second-quarter earnings season, with earnings up 8.6% so far, according to Refinitiv. Energy has been a major contributor. The price of oil averaged well above $100 a barrel between April and June. But now it’s below $90.

Source: Refinitive

The best tickers

Here were the most active stock tickers on MarketWatch at 6 am ET.

Heart

security name

AMC,
+2.47%

AMC Entertainment

TSLA,
+0.40%

Tesla

gme,
+1.13%

gamestop

AAPL,
-0.19%

Apple

LITTLE BOY,
+2.96%

LITTLE BOY

AMZN,
+2.19%

Amazon

slime,
+1.79%

alibaba

CURRENCY,
+10.01%

base of coins

amd,
+5.93%

advanced micro devices

XELA,
+14.38%

Excela Technologies

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