Invest in What You Know (EP.268)

Episode Summary

Executive Summary: Ben and Michael wrestle with whether the U.S. is in a recession after two negative GDP prints, arguing the answer is less important than the broader signal: the economy is slowing, inflation is still elevated, and markets are pricing a messy path ahead. They use earnings, labor, housing, and policy data to show a split economy, then assess a mixed earnings season with mega-cap tech and travel holding up while ads, retailers, and some growth stocks struggle.

Main Topics: Recession debate and the meaning of GDP (Priority: 5/5): The hosts revisit the definition of recession, noting that two negative GDP quarters do not automatically equal a recession and that the NBER uses a broader set of indicators. They argue the first half of 2022 was not a recession, even if one may still be coming. Fed policy, inflation, and market whiplash (Priority: 5/5): They discuss the Fed’s aggressive rate hikes, the market’s reaction to Powell’s comments, and the possibility that the Fed may need to keep tightening if inflation stays sticky. The conversation emphasizes how unusual it is for the Fed to be hiking while GDP contracts. Earnings season and the split economy (Priority: 5/5): They review company earnings from Apple, Amazon, Google, Microsoft, Visa, Spotify, Meta, and Shopify to show that some businesses are doing well while others are clearly under pressure. This supports their view that the economy is uneven rather than uniformly recessionary. Housing as a leading recession signal (Priority: 4/5): The hosts note that housing is rolling over, with pending home sales weak and starts softening, which historically is a reliable early recession indicator. At the same time, some homes are still selling quickly if priced correctly, showing a transition rather than a collapse. Market bottom or bear-market rally? (Priority: 5/5): They debate whether the summer bounce marked a true bottom, weighing strong mega-cap earnings, falling inflation expectations, and retail participation against still-tight policy, slowing growth, and weak earnings revisions. They lean cautious and think the market may be rallying before data softens further. Consumer behavior, labor, and real wages (Priority: 4/5): They highlight that job switching has boosted real earnings for many workers and that spending remains strong in travel, leisure, and card data. This suggests consumers are still active even as inflation erodes purchasing power for those who stay put. Media, movies, and side discussions (Priority: 2/5): The back half of the episode includes lighter tangents on streaming, old movies, sports anchors, and podcasts. These segments mostly serve as palate cleansers after a dense macro/earnings discussion.

Key Arguments: The first half of 2022 was not a recession because the broad NBER indicators—employment, spending, production, and income—were still positive. Two negative GDP quarters are not sufficient to define a recession; the broader economic picture is more important than the headline print. The Fed is in a rare position: tightening into slowing growth, which raises the risk of overdoing it and causing a recession. The market rally may reflect better-than-feared earnings and a less hawkish Fed, but it could still be a bear-market rally if inflation and rates remain elevated. Earnings season showed a bifurcated economy: travel, payments, and major tech looked resilient, while ad-dependent businesses, retailers, and some growth names faced real pressure. Housing is a key leading indicator; the slowdown in starts and pending sales suggests recession risk is rising even though sales that do close are still moving fast. Retail investors have not fully capitulated, which argues against a final bottom in equities. Analyst earnings estimates are still too high for a true recessionary environment and likely need to come down more. Job switching has been one of the few clear ways for workers to beat inflation in real terms. The market’s confusion mirrors the economy’s confusion: some sectors look strong, others look clearly weak, and policy will likely determine which side wins.

Data Points: U.S. real GDP q/q: -0.9% for the latest quarter discussed - Used as the headline reason for recession debate Consecutive negative GDP quarters: 2 - Second and third quarters of 1947 were cited as a historical exception without a recession NBER recession indicators tracked by BofA: 6 variables - Real personal income less transfers, payrolls, household employment, industrial production, retail/wholesale sales, and real consumer spending BofA recession indicators: All positive YTD - Used to argue the first half of 2022 was not a recession Fed rate hike: 75 bps - Referenced after the most recent FOMC decision S&P 500 distance from highs: 13% below highs - Mentioned while discussing tightening policy and market volatility Apple quarterly revenue growth: 2% y/y - June quarter commentary Apple stock drawdown: -29% at lows - Michael and Ben discussed Apple’s decline during the selloff Amazon workforce change: -99,000 employees q/q - From Q1 to Q2, highlighting overhiring and subsequent cuts Amazon total workforce: 1.52 million - Illustrates scale of the company Microsoft workforce growth: +40,000 employees / +22% y/y - Shows continued hiring at some large-cap companies Visa revenue growth: 19% y/y - Payments and travel activity remained strong Visa cross-border travel volume: 104% of Q3 2019 / Q2 2019 level - Evidence of travel recovery Spotify planned hiring reduction: 25% - Proactive slowdown response despite no immediate user/subscriber hit Meta/Facebook stock performance: Down over 5 years - Used to illustrate how far some growth stocks have fallen Tech IPO proceeds: $512 million - Versus $58.7 billion last year, showing a near-shutdown in tech issuance Tech IPO proceeds decline: ~99% lower y/y - Ryan Peterson stat cited in discussion Retail investor net purchases: Still buying tech basket - VandaTrack data suggested retail capitulation had not occurred PEW switching-worker real earnings: 60% saw an increase - Workers who changed employers during Apr 2021–Mar 2022 PEW staying-worker real earnings: 40% saw an increase - Those who stayed in the same job were less likely to beat inflation Pending home sales index: Lowest in 10 years - Excluding the brief 2020 shutdown period Home sales speed: 14 days average in June - Homes that sold moved very quickly despite weaker demand Housing starts: Rolling over - Used as a recession-leading indicator Rivian market cap: $31 billion - Despite steep declines, still viewed as elevated by the hosts Spotify stock drawdown: ~70% off highs - Used to highlight the scale of the selloff in growth stocks Apple stock reaction: Up strongly after earnings - Helped support the idea that mega-cap tech was still resilient

Pivotal Quotes: "We're still confused." — Ben Carlson: Closing the discussion on whether the market and economy have found a bottom "The recent debate about whether the U.S. is already in a recession is a distraction." — Bank of America Global Research (quoted by hosts): Used to emphasize that the more important issue is whether recession risk is still ahead "Rare to see the Fed actively hiking rates while GDP is contracting." — Lizanne Saunders: Illustrates how unusual the current macro backdrop is

Implications: Listeners should expect continued volatility: the economy is split, inflation is still the main variable, and markets may have rallied too early. The next few months of data and Fed decisions will likely determine whether the bounce becomes a true bottom or just another bear-market rally.