The bumpy start to the month has mostly been attributed to the renewed fears of recession and the idea that the Fed may already be late to cut interest rates. Many indicators have long warned of a recession, but none as popular as the inverted yield curve, in which short term bonds have greater yields than longer term bonds. This inversion implies greater economic risk in the short term. For this particular cycle, what has raised eyebrows and doubt in this indicator’s predictive power is the amount of time lapsed since the inversion that began in July 2022. This has become the longest inversion in history without a recession.  Although we continue to respect this indicator, we also believe the pandemic/COVID cycle has rendered many indicators less effective. One may risk seeming foolish to say “This time is different”, but a forced economic shutdown and a furious reopening combined with unprecedented government intervention is simply not ‘text book’. Thus we should not expect ‘text book’ outcomes.

What we can say confidently is that we are not in a recession today. The recently announced Q2 Real GDP Advanced Estimates came in at +2.8%. This is a pickup from the +1.4% in Q1. The unemployment rate, although rising, still sits at an impressively low 4.3%. This portends well for a consumption driven economy that continues to print strong retail sales figures. One could also argue that the recent rise in unemployment is attributed to an increase in supply of labour due to higher workforce participation and more people (re)entering the workforce. This is ultimately more favorable compared to the alternative of higher unemployment caused by a decreased demand for labour. Finally, with 80% of corporations beating Q2 earnings expectations and all sectors forecasted to grow earnings throughout 2025, signs of a severe slowdown do not seem apparent.

Although many of us may agree that we are not currently in a recession, this does not negate the idea that we could be heading towards one. That said, at this moment, we feel all signs continue to point towards a soft landing for the economy. Not only does the current economy seem resilient, but investors are to be reminded that we are on the precipice of interest rate cuts which should help relieve any unforeseen negative momentum for the economy. Most importantly, the Fed has been communicating to investors that they are not clueless of the cracks forming in the economy. This is opposed to the stance the Fed took in 2021, where they seemingly brushed off the market’s concerns of rising inflation. At that time, the Fed truly had their head in the sand. This time around, they appear to be on the same page as investors, acknowledging that unemployment is rising, wage growth has waned, and consumers are taking a more value oriented approach to spending. As a result the Fed has begun to signal that interest rate cuts are on the horizon, perhaps as early as September. Hence, with the Fed seemingly in a ‘ready position’, we believe the likelihood is small for weakness to accelerate to the point of no return.

Investors should benefit from strong fundamentals, yet should be emotionally prepared for volatility.  Markets will continue to contend with a seasonally weak period for the market, geo-political uncertainty, international market imbalances and continued debate around the magnitude and speed of rate cuts. That said, we believe long term investors can use these pullbacks to add to equities.