*. A so-called hard landing in the U.S. economic system is unlikely to occur. This is a false fear. It may be a bumpy landing but there are very low odds of a hard landing — such as a recession.
If I’m right, it confirms the extremely negative sentiment that is already telling us: Stocks should be bought.
I also suggest several stocks, below, that artificial intelligence tells us may be among the best performers, as investors figure out recession risk is low.
1. The economy is strong
That 1.4% first-quarter GDP contraction is pretty misleading. This was due to a decrease in federal spending and an increase in trade deficit. Ed Yardeni, Yardeni Research, says that there are two more indicators that indicate economic strength. He points out the 3.7% rise in final sales to domestic private buyers. The real personal consumption expenditure also reached a new record.
*We also see signs of global strength. Excluding China, global services and industry purchasing managers indices came in at around 55 for April. Below 50 signals economic weakness, so this is a decent reading.
The global economy is coping with the near-term headwinds fairly well,” JPMorgan economists say. They expect 2% global GDP growth in the second quarter.
2. The yield curve is not predicting a recession
The yield curve is the gap between various short-term and long-term interest rates in the bond market. This reliable recession forecaster is quite good. The yield curve is currently moving upward. It is not predicting a recession. “We expect that the Fed may well be able to avoid a hard landing,” says John Stoltzfus, the chief investment strategist at Oppenheimer Asset Management “That said, a bumpy landing is not out of the question.”
3. Companies are guiding up, not down
Companies are the economy. The top managers expect more growth. This is because top managers are leading future earnings higher. Second-quarter earnings guidance is slightly above the long-term trend, says Credit Suisse.
4. The household sector is strong
Typically, economies are vulnerable to recessions when households borrow too much money, then get into trouble because they cannot pay it back. This is not the case right now.
*People squandered a lot of money during this pandemic. So, households had a surplus worth 3.6% of GDP in late 2021, compared to an average of 2.8% over 1985-2019, note Goldman Sachs economists. Jan Hatzius, a Goldman economist, says that the household sector is particularly strong. “Soft landings are more common when private sector financial balances are healthy.”
5. Companies are cash-rich
Cash holdings increased substantially during the pandemic at businesses small and large. This was also true for riskier junk bond issuers. These are the ones that explode when interest rates rise. This causes recessions and spreads damage to banks and business partners. Hatzius says that there is very little risk of financing vulnerability due to the fact that most high-yield issuers have refinanced at favorable rates. The record-setting corporate profit margins are also still high.
” The conditions that could undermine the expansion are still not established, according to JPMorgan economists. “The private sector is in remarkable good health. Balance sheets are flush with cash.”
6. Junk bond credit spreads are narrowing
The spread between yields on riskier, high-yield “junk bonds” and safer U.S. government bonds can be a good recession indicator. It indicates that bond investors are fleeing riskier companies in anticipation of a recession. Martin Pring, InterMarket Review investor letter, says that this spread is shrinking right now. Pring says that investors are willing to take on more risk in order to achieve a higher yield. “In other words, they are downplaying the prospects of a recession.”
7. Signs confirm inflation has peaked
In addition to the signals I mentioned in this column, core CPI for March came in below expectations when it was reported in late April. This was the first reading below consensus since August. Hatzius, at Goldman Sachs, says that “we believe the peak in core inflation is now past us.” “The rise in goods inflation due to shortages and rising commodities prices has likely peaked. This should slow down by year-end .”
.Goldman predicts that inflation will return to the 2% range by next year. Hatzius expects 2.4% at the end of 2023. This may seem far away. Remember that stock market prices tend to trend six months ahead of the actual date. Stock investors will be reassured if there are signs of improvement. We get important April consumer and producer price inflation reads this week — May 11 and 12.
8. Company insiders see no recession ahead
Corporate insiders are not dumping stock in excessive amounts relative to their buying. They tell us there is no recession. Vickers Insider Weekly reports that insiders at New York Stock Exchange companies have been bullish in recent sell-buy ratios. The NYSE long-term measures are neutral. The insider sell-buy ratios are also neutral for Nasdaq. Although I would prefer to see insiders be bullish, they are not cautious.
Stocks to consider
Given that the wild volatility has made a lot of people emotional, I think it makes sense to turn to the “machines” for stock ideas, meaning algos that use artificial intelligence (AI) to spot buyable stocks.
. So, I met Jan Szilagyi who is the CEO of Toggle. The system uses AI to select stocks based on machine learning and quantitative analysis. Toggle has about a hundred institutional clients with $185 billion under management, as well as 70,000 retail investors, says Szilagyi, a former quant trader at Stan Druckenmiller’s Duquesne Capital.
” The system searches for assets that appear so stretched, so expensive or so costly that it favors a move in one way,” he said.
.Toggle analyses dozens of data points, from analyst expectations and valuations to fundamental factors like relative strength and price momentum.
. The group with the highest stretched valuations to the upside at the moment. Homebuilders and related retailers. Lennar is cited.
“All five, from the system’s point of view