Are We In A Recession?

Are we in a recession is the question going through the minds of many retail and institutional investors? It certainly feels that way because the stock market is officially in a bear market. The year-to-date declines of all indices except the Dow Jones Industrial Averages (DJIA) are down at least 20%, the threshold for a bear market. The Nasdaq is down (-30.3%), and many tech stocks are down much more. Interestingly, the FTSE 100 has performed relatively well because of the greater number of commodity stocks. So why has gold not performed better despite sky-high inflation being an enigma?

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Stock Market Overview

Source: Stock Rover*

Along those lines, inflation is the highest in decades, and prices are increasing. For example, oil, natural gas, and vehicle fuels broke records in many places. Geopolitical issues and one of the worst droughts on record in Europe and China have exacerbated the problems, especially regarding food prices. Yet, surprisingly, the American and global economies are still performing decently. 

To answer the question of whether we are in a recession, we will examine a few factors first and then answer the question.

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Are We in a Recession


Stock Market

Inflation is affecting the stock market because interest rates are rising in response. Investors expect an economic slowdown and increasingly a hard landing engineered by the US Federal Reserve. This expectation has driven down stock prices. Four bear markets have occurred in the past two decades. It is part of the typical investing trajectory.

Even a favorite tech stock like Inc (AMZN) is down (-33%). Granted, Amazon’s subscription service, Amazon Prime, will insulate it somewhat during a recession, but investors are clearly expecting the worst.

quote from John Bogle, however, says it best.

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”


Oil and Gas Prices

Oil and gas prices rocketed skyward in 2022 because of too much demand and insufficient supply. In addition, the War in Ukraine caused speculative trading. As a result, oil prices reached $130+ per barrel, and some expected even higher prices. Oil prices, instead, reversed course and declined, trading at ~$79 per barrel, the lowest in eight months.

Similarly, average gas prices in America have declined to about $3.70 per gallon, just above the low of $3.68 after 98 consecutive days of falling. However, demand is still decreasing, and supplies are increasing, especially as office occupancy has risen.

Some past recessions have been triggered by high relative oil and gas prices, but current oil and gas prices do not suggest a recession.


Food Prices

Food prices continue to rise at a torrid pace. Labor shortages, higher freight costs, the War in Ukraine, and record-breaking drought are primary reasons.

Labor shortages are occurring because new immigration policies affect the labor pool that typically works in the food chain. Next, the COVID-19 pandemic changed where people work and eat, disrupting food producers’ customer base. Third, freight costs are rising because of high labor and fuel expenses. Lastly, the War in Ukraine and drought are wild cards, making wheat and other grains expensive.

Food prices are driving inflation but are likely not enough to cause a recession. Furthermore, the strong US dollar makes food imports cheaper.


Mortgage Rates

Mortgage rates are soaring. The 30-year fixed rate mortgage (FRM) is now more than 6.25%, the 15-year FRM is 5.4%+, and the 5/1-year adjustable-rate mortgage (ARM) is nearing 5%. In addition, the US Federal Reserve gain increased the Fed Funds Rate, so rates will probably keep trending upward. In response, home sales are plunging.

Historically, mortgage rates have climbed to over 6% preceding a recession. We are at that level now.

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Mortgage Rates

Source: FreddieMac



The US unemployment rate and job growth suggest we are not in a recession. The unemployment rate is only 3.7%, hardly a level indicating a recession. Furthermore, the US has had 20 months of consecutive job gains. That said, the Fed is predicting unemployment to rise to 4.4%

These statistics suggest we are not yet in a recession.


Gross Domestic Product

The Gross Domestic Product (GDP) has declined for two quarters in a row. In the first quarter, the GDP contracted at a rate of 1.6%; in the second quarter, the GPD decreased by 0.6%. Two consecutive quarters of economic contraction usually define a recession as determined by the National Bureau of Economic Research. However, they have not officially stated the United States is in a recession.


Final Thoughts on Are We in a Recession?

Although we are not officially in a recession, the economic trends are not good. The Fed is determined to bring sustained inflation down to 2%, and we are far from that level. As a result, investors are fleeing riskier assets and paring money in cash. US Government-issued Series I Savings Bonds are among the best deals in an inflationary environment for retail investors. If your brokerage account allows it, 1-year US Treasury bonds are paying 4.1%+. Other low-risk short-term investments include CDs, MMDAs, and high-yield savings accounts.


The Stock of the Week

Today we highlight General Mills (GIS), the owner of Cheerios, Wheaties, Blue Buffalo, Pillsbury, Fiber One, etc., brands. According to Stock Rover*, the stock price was up about 20.12% YTD and 36.2% in the past 1-year, making it one of the better-performing stocks in 2022. General Mills is performing well in a volatile and declining market because of increasing revenue and earnings. 

The forward dividend yield is about 2.73%, and the price-to-earnings ratio is about 19.31X, above the 5-year and 10-year ranges. Moreover, the dividend is covered by a reasonable payout ratio of 54%. Although likely overvalued, investors should keep this stock on their watch list.

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General Mills Insight

Source: Stock Rover*


Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.


Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of August 2022. As a result, the number of companies on the list has risen to 569. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in August.

The new additions were Mativ Holdings (MATV), Newtek Business (NEWT), Southern Copper (SCCO), Weber (WEBR), Encompass Health (EHC), and Healthcare Realty Trust (FR).


Market Indices


Dow Jones Industrial Averages (DJIA): 29,593 (-3.99%)

NASDAQ: 10,868 (-5.07%)

S&P 500: 3,693 (-4.64%)


Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 18.66X, and the Schiller P/E Ratio is about 27.65X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. Earnings multiples of more than 30X are overvalued based on historical data.


S&P 500 PE Ratio History

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SP500 PE Ratio



Shiller PE Ratio History

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Shiller PE Ratio



Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was up about 3.5 points at 29.92. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.


Source: Google


Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

10-Year Bond minus 3-Month Bill

Source: NY Fed

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Spread Between 2-Year and 10-year US Treasuries

Source: St. Louis Fed


Economic News

The US Census Bureau reported housing starts increased 12.2% to a seasonally adjusted annual rate of 1.575M units in August. The July data was revised to 1.404M units from the previously reported 1.446M units, reflecting a drop of 10.9% vs. 9.6%. New residential building permits, a proxy for future construction, fell 10.0% to a seasonally adjusted rate of 1.517M units. New residential building permits are running 14.4% below their August 2021 level. The decline in building permits was broad-based, led by the Northeast (-15.2%), followed by the South (-13.5%), Midwest (-6.5%), and West (-1.1%).

The Federal Open Market Committee (FOMC) announced raising its benchmark federal funds rate by 75 basis points, putting it in the range of between 3.00% and 3.25%. This increase is the fifth rate hike since March and the third consecutive FOMC meeting ending with a 75 basis point climb. The FOMC, in its statement, said, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.” The FOMC also projected an increase of 125 basis points over the next two meetings to a 4.4% fed funds rate.

The Labor Department reported an increase in initial jobless claims for the week ending September 17th. The seasonally adjusted initial claims were reported at 213,000, an increase of 5,000 from the previous week’s revised level. The last week’s level was revised down by 5,000 to 208,000. The four-week moving average, which smooths out volatility was 216,750, a decrease of 6,000 from the previous week’s revised average. Additionally, of the 53 states and US territories that report jobless claims, 35 reported increases, and 18 reported declines.

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