You’re about to witness something historic. I say this without hyperbole or sensationalism. Now it might not be as exciting as the Moon Landing, the fall of the Berlin Wall, the 1980 U.S. Olympic Hockey team defeat of the Soviets, the advent of the Internet, or Cal Ripken Jr. breaking Lou Gehrig’s record (yes, I’m an Orioles fan). And it won’t likely be as gut-wrenching as some of the more negative history we have witnessed over the years, well at least not gut-wrenching for long. But history will be made and very few people will even notice.

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Conflicting narratives have developed in the markets and economy that are unprecedented and something is going to give. There are three main points to be aware of:

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1) There are economic indicators that have a 100% track record of predicting recession and they are boldly predicting an imminent recession. If a recession does NOT happen, it will be historic. It will impact the fundamental studies of the U.S. Economy forever as people will say “Every time these indicators have reached these levels, we’ve always had a recession EXCEPT for 2023.

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2) The stock market has only bottomed prior to a recession once and that was in 1942. That particular market was much stronger and more robust than the one we have now. If a recession does come but the market does not fall to a lower low than October 2022 it will be historic. It will impact market expectations forever as people will say “The market has always bottomed in the midst of a recession and never prior EXCEPT for 1942 and 2023.

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Now I think we can agree these first two points speak to more pain to come for the markets. If a recession is imminent and the stock market never bottoms prior then it would stand to reason there’s another round of painful declines yet to come. Ah.... not so fast.

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3) The stock market, as measured by the S&P 500, has had technical achievements since the October low that no market has ever accomplished unless the “low was in” and the worst was behind us. If the market fails at this point and moves down to a lower low it will impact the technical studies of markets forever as people will say “The worst has always been behind us when the stock market has accomplished these things EXCEPT for 2023. And that’s where we find ourselves today. In the middle of two opposing narratives. A potential recession around the corner that should lead to another market decline and a market that suggests the worst is behind it. ​

 

I know the idea that the market could be right is the most difficult to believe but that is exactly how new bull markets begin. The stock market makes significant moves off of its low point and no one believes in it because the news is still worsening. By the time the news cycle improves, the stock market is up 20% to 30% and investors have missed out on the recovery. 

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The question can be asked, “How can that be the case if a recession is imminent?” Well, a couple of points on that as well. If it happens, this would be the most telegraphed recession in U.S. history. As such, the corporate community has been extremely proactive with many companies laying off employees even though their corporate earnings have been fine. All of this preparation could cause us to avert the recession altogether at worst make it very mild. The market could very well be looking past a mild recession and taking a place in history next to 1942.