The argument for a mild recession Here is a reasonable argument against a hard landing or severe recession.
If a recession arrives in the coming months then it's unlikely we reached the bottom which will likely occur at the middle of the recession or 5-6 months in. On the other hand, historically speaking, it is very rare to have two back to back negative annual returns from the stock market. Many times, the follow up year, the twelve months that follow, can provide some of the best returns for the next bull market cycle.
Why is this inflationary period different than the other periods; namely the recession of 1969, 1973,1980,1982 and 1990 periods? The argument for a mild recession and the strongest argument would be the excess savings that households have accumulated from the pandemic. In the US, this would amount to about $2.5 trillion and in Canada $300 billion in savings. After all, people were not spending their money during the pandemic and the increase in the money supply gave everyone the illusion that they were wealthy. Of course, most people should realize by now that inflation was caused by excess money chasing fewer goods. In addition to the supply chain woes which compounded the situation. Just to put things into perspective, it would take several years for this excess money to be spent which should continue to help support the economy. For instance,
$2.5 trillion represents about 10% of nominal gdp in the US whereas in Canada it represents around 15% of gdp. This will act as a buffer in my opinion against a severe recession. The layoffs will probably be minimal and likely tied to the housing/real estate part of the economy.
Many times the housing market leads us into a recession and I expect this time to be no different. As the value of peoples homes dwindles, the wealth effect will begin to catch up to people and cause them to spend less of their disposable income. If you feel less wealthy, your propensity to consume will decrease over time. While I believe this to be true, the excess savings will safeguard the consumer from risk of ruin.
A few interesting observations. The excess savings or $2.5 trillion could support 2 years of nominal gdp at 5% per year. In other words, 2023 may not be as bad a year as some might imagine. We are in a stagflationary period which will probably last another couple years. Inflation will come to an end when all of this excess savings has been spent which should probably subside by 2024/2025. Now I digress.
Companies that are spewing cash will survive a hard landing which is why you want to invest in companies that have low debt levels and good cash flow generation. Tva group is a deep value play that will pay off at some point in the future even though it may struggle over the next 12 months. I'm ok with that.
long tva group