No Clear Sign Of Recession Yet, Says Nick Reece

Episode Summary

Executive Summary: Nick Reese argued that the S&P 500’s drawdown is better viewed as a cyclical bear market inside an ongoing secular bull market, not a classic valuation bubble. He sees recession risk as elevated but still below 50% over the next six months, expects the Fed is near the end of its hiking cycle, and thinks peak inflation, peak hawkishness, and softer sentiment could support a market bottom.

Main Topics: Recession risk and bear markets: Reese said all major U.S. bear markets have been tied to recessions, but not all recessions cause bear markets. He believes current data does not yet confirm recession, though risk is elevated over the next six months. Fed policy, inflation, and the likely pivot: He argued the Fed has tightened aggressively through rates and mortgage rates, but is likely near the end of the cycle. He thinks peak inflation expectations and falling gasoline prices could allow the Fed to slow or pause hikes. Market structure: secular bull vs cyclical bear: Reese framed the selloff as a cyclical bear market within a longer secular bull market. He said valuations have compressed, but long-term structural bull-market logic still holds. Historical analogs and timing signals: He repeatedly referenced 1946-49, 2018-19, the 1990s, and other historical cycles to argue that markets can bottom before recession fears resolve and that soft landings are possible. Global growth, PMIs, and China: He noted global manufacturing PMIs remain above 50 in major economies and China is re-accelerating, suggesting a mid-cycle slowdown is still compatible with a soft landing. Asset allocation and relative value: He preferred duration trades, especially Eurodollar futures, over outright shorting stocks. He highlighted small- and mid-cap value, some international markets, and caution on speculative IPO/SPAC names. Liquidity, central bank balance sheets, and sentiment: He said liquidity and negative sentiment have contributed to the decline, but extreme pessimism can be contrarian bullish. He also downplayed the idea that QT alone guarantees a deeper bear market.

Key Arguments: Major bear markets in U.S. history have almost always coincided with recessions, but recessions alone do not guarantee bear markets; history shows several recessions without 20%+ declines. The current selloff looks more like multiple compression from rising discount rates than a fundamental earnings collapse. The Fed’s tightening is already being transmitted through mortgage rates, which he sees as a more important channel than the overnight policy rate. Peak inflation may be near because gasoline prices and commodity inputs are rolling over, core PCE has fallen for three straight months, and M2 growth has normalized. A soft landing remains a meaningful base-case possibility because labor force participation can recover and job gains can stay positive even if unemployment edges up. The best recession hedge may be long Eurodollar futures rather than short equities, because Fed cuts in recessions can create a more favorable payoff. China and global PMIs are not uniformly recessionary; China’s re-acceleration and broad global expansion above 50 argue against a simple hard-landing narrative. Extremely bearish sentiment is itself a bullish contrarian factor and may set the stage for a recovery rally or larger advance. Valuations are elevated versus long-term history but are poor timing tools; market tops usually require more extreme valuation excess than seen here. The IPO/SPAC bubble was real in speculative corners, especially among free-cash-flow-negative companies, but that does not necessarily mean the entire market is in a historic bubble.

Data Points: S&P 500 drawdown: about 20% to 21% down; max drawdown mentioned near 24% - Used to frame the current market as a bear market/correction, but not necessarily a bubble unwind. Recession probability through remainder of 2022: less than 50% - Reese’s base-case view for the next six months. Core PCE YoY trend: down for three consecutive months - Evidence supporting the view that inflation may have peaked. Headline CPI MoM expectation: close to 1% - He warned the next CPI print could look very hot because mid-June gas prices were still elevated. Gasoline price threshold: above $5 national average at one point - One of the triggers that pushed the Fed toward a 75 bp hike. Fed June hike: 75 basis points - Reese said this was influenced by a worse-than-expected CPI print and inflation expectations. Potential July Fed hike: 75 basis points, possibly final hike of cycle - He said July could be the last hike if inflation data cools. Mortgage rates: from under 3% to over 6% in under a year - He argued this is the most important real-economy tightening channel. Labor market sweet spot: 100,000 to 400,000 net payroll gains - A positive jobs report in his view would include gains plus a slight rise in unemployment. Unemployment rate scenario: 3.6% to 3.7% - He said a small rise could still be constructive if labor force participation improves. Atlanta Fed GDPNow Q2 estimate: -2.1% annualized at one point - He cautioned that GDPNow can be noisy and is not the NBER’s recession definition. Q1 GDI vs GDP: GDI positive while GDP negative - Used to argue Q1 may not have been a true recession signal. U.S. inventory/global PMI context: 12 of 12 largest economies above 50 in manufacturing PMI - He cited this as evidence of ongoing expansion globally. China PMIs: moving higher and above 50 - He said China’s re-acceleration matters for the global cycle. German unemployment increase: up due to refugee inflows - He interpreted the rise as labor supply expansion, not necessarily recession. Overnight policy transmission: 30-year mortgage rate from under 3% to over 6% - Illustrates how Fed policy is hitting housing and inflation lagged effects. U.S. dollar index: 107 on DXY - He said the dollar is expensive relative to historical valuation levels. Peak inflation example: CPI YoY peaked at 19.7% in March 1947 - Historical analog for post-war inflation and market behavior. 1946-49 market decline: about 25%-26% inflation-related decline, then about 20% recession-related decline - Used as a key historical template for inflation plus recession phases. IPO bubble comparison: more IPOs in 2021 than at the dot-com peak; capital raised about 4x dot-com bubble - Evidence that the speculative frenzy was concentrated in new issues. Market vs 10-year moving average: SP about 90% above its 10-year moving average at the peak - He said this was below the extreme levels seen before historic bubbles/crashes. Two-year yield: spiked to about 3.45% in mid-June - He viewed this as a potential peak in priced-in Fed hawkishness. Inflation “annualizes to 2%” monthly pace: about 0.17% MoM - He said that is the rough target pace the Fed would want to see in PCE.

Pivotal Quotes: "All major bear markets are associated with recessions, but not all recessions are associated with bear markets." — Nick Reese: His core historical framework for separating recession risk from equity-market crash risk. "I think the soft landing scenario is probably being underappreciated as a possible outcome here." — Nick Reese: He was discussing inflation peaking, Fed tightening nearing completion, and a possible market bottom. "You have to look at fundamentals always relative to price." — Nick Reese: He emphasized that macro data only matters in the context of market pricing and sentiment.

Implications: Listeners should view the current selloff as potentially closer to a mid-cycle reset than a long-term regime break. If inflation cools and the Fed pauses, duration trades, value stocks, and quality balance sheets may outperform while speculative names remain vulnerable.