Hey hey, happy Monday!

Thank you to everyone who came out to the Chop Shop last week to see the Compound team live in Chicago! I loved meeting all of you, especially the faithful OptimistiCallie readers. Y’all are the best.

I wrote this 5-minute rant on the plane back to Charlotte, partially as a release for my own frustrations around markets right now. Gauging the economy’s health is a big part of my job, considering my Ritholtz colleagues and I maintain portfolios that should protect our clients against big tail risks.

But TBH, it’s so damn hard right now. Sometimes, you just have to ask yourself what you’re even doing here.

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LVHI: An ETF built for today's market

It feels like we’ve been on recession watch for weeks now.

Waiting with bated breath for that one bad economic report that tells us a recession is right around the corner.

That’s how recession watch works, right? Look for that big spike in unemployment claims or that negative payrolls number, then brace for the worst. 

A lot of Wall Street operates under this assumption. If you know what you’re looking for, you can spot trouble before it hits.

But in these cloudy days of muddy economic data, I’ve been entertaining a different approach.

Maybe there isn’t a moment of clarity before the crisis hits. Perhaps it’s more like a frog in boiling water. Before we know it, it’s dinner time, and we’re a few minutes away from a serving platter.

Yes, an overused analogy for a delicacy we rarely enjoy. Still, I hope you get my point.

Smart economic minds on Wall Street have argued that the U.S. economy doesn’t go through natural boom-and-bust cycles anymore. Instead of the economy growing, stalling, and contracting over and over again, we may be in an era where the economy perpetually grows at different rates until an outside force stops that growth, be it an oil shortage, a trade jolt, or a pandemic.

It’s an interesting theory. Seventy years ago, the economy looked a lot different from what it does today. 

The actual shifts in GDP (gross domestic product, the value assigned to everything we do and spend) are small, but significant. We rely more on the spending appetites of Americans and businesses, and less on manufacturing capacity and real estate purchases.

Money spent on rent, haircuts, shows, and brewery dates now swamps money spent on TVs, shoes, and bicycles. Inventory cycles – or the ebbs and flows of company production that anticipate a better/worse economy – are a thing of the past. The global economy is intricately connected, which makes every region around the world more resilient (even though this administration is actively trying to destroy this advantage).

What can’t be charted, though, is how well we’ve come to adapt to the changing waves of society. Technology helps individuals find jobs and side gigs better suited for their personal needs, and businesses better optimize hiring and costs.

Then there’s the sensitivity of the world to policy. Interest rate policy, budget policy and (oh god, we’re going there) tariff policy. The Federal Reserve – those adorable interest-rate tweaking nerds in D.C. – may not have as much sway in slowing down the economy, but boy has the commander-in-chief chilled the corporate atmosphere with his half-baked ideas. The administration backs off and markets cheer, invoking a mirage of stability…until the ground shifts again the next day.

This time is different. No, really, it is.

And this generational evolution in the economic foundation should change how we anticipate recessions.

Not necessarily what we’re watching, but what we expect to see before we’re in the bad place.

I’ve talked about my economic framework before. I watch data almost solely dedicated to how well consumers and businesses can operate in an environment: job market indicators, confidence gauges, and market-based interest rate metrics. If people can’t earn, spend, or borrow money, then this economy is toast. It’s not rocket science.

But lately, when these indicators have screamed recession, it’s been too late to duck and cover.

Take first-time claims for unemployment benefits – the classic canary in the coal mine for the job market. Since the 1970s, initial unemployment claims have begun to rise an average of 12 months before a recession has started. 

Today, we are technically there. Initial claims are rising at a 5% pace year over year. Not a crazy move higher, but higher regardless.

Still, Wall Street is watching for that unusually high claims number to declare a recession. But if the economy doesn’t naturally deteriorate, we may get that abnormal report when we’re already reeling from an external shock, and fully in the bad place.

What about hiring? We all sighed with heavy relief after Friday’s gross jobs report, which showed the pace of hiring has been a lackluster 120,000 jobs per month this year (compared to an average of 180,000 in the 2010s). Why? Because at least companies are adding jobs, according to a few takes I’ve seen. I even read a note from a major bank that classified the report as “solid” because the number of jobs grew.

Well, if you’re waiting for a drop in payrolls, you might be a step behind. Negative payrolls prints often happen when the economy is shrinking, not before.

This is a lot of economic theory, but it should change how you think about your money in this moment.

We’re all waiting for that big red flag to take this slowdown seriously.

Have we considered, though, that in very weak – yet not disastrous – data, that we’ve seen all we need to see?

The economy is already vulnerable. Worn down by several shocks – high interest rates, trade policy, and government spending cuts. Every swing of the hammer deepens the cracks. If cycles end with external shocks, then it probably takes less of a hit to cause the foundation to break at this point. The line for a crisis keeps moving closer, even if we’re not sure when the economy will cross it.

Your intentions also matter here. If you read my newsletter to get a sense of what’s going on now, so you can make your smartest decisions for the future, then your recession watch is over. We may only be one headline away.

Not to mention the fact that the stock market, of all things, tends to start dropping before a crisis starts. 

In the 11 recessions since 1950, the S&P 500 has peaked an average of six months before the economy entered a recession. And over that same period, the S&P has bottomed an average of three months before a recession has ended.

Your portfolio could force your hand before you know it.

Now, what you do with this information is up to you. Recession prep looks different for everyone. Maybe it’s a plan for your finances if you or your partner loses their job. Or steps to buy the dip if the stock market falls 20% or more.

It probably doesn’t look like selling all of your investments and running for the hills – that’s end-of-the-world stuff, and you only make that bet once.

And for many of you, it looks like leaning into chaos because you have decades ahead of you.

But when you’re in the thick of it – and recession-fueled market drops take an average of 35 months to play out and recover – you need to have the tools to make the best decisions for your money. 

Everybody can benefit from a little risk management here and there.

Thanks for reading!

Callie

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