THE STATE OF THE MARKET:
One quick Google search would have you believe that we’re in the worst recession since 2008. Hundreds of thousands of people have been laid off, companies have shed trillions of dollars worth of market cap, and inflation has been off the charts. But at the same time, several other metrics would suggest that things are going just fine. I mean, just take a look at the billionaires' list. The vast majority of billionaires are up substantially this year and the most notable ones are up the most. Elon Musk is up $110 billion. Jeff Bezos, up $47 billion. And Mark Zuckerberg, up $58 billion. The same thing can be said about most notable stocks as well. Netflix has recovered 175%. Meta has recovered over 200%. And as for Apple and Nvidia, well these guys are straight up setting all-time highs.
Apple has surpassed a $3 trillion market cap and Nvidia has joined the trillion-dollar club. Also, it’s not just these big tech companies that are doing well either. Mcdonald's, all-time high. Louis Vuitton, all time high. Eli Lilly, an all-time high. And even Bitcoin, one of the riskiest assets on the planet has recovered a 100%. As such, I don’t think you’d be surprised to hear that the S&P 500 is doing pretty well too. The index has recovered 27% and it’s only 7.5% away from all-time highs. Inflation has also cooled down substantially to just 4%. By the time you’re watching this, inflation may even be in the 3% range. Margin levels have also dropped significantly from nearly a trillion dollars down to pre-pandemic levels of $644 billion. So, where exactly is all this fear coming from? Why are companies seemingly bracing for some sort of great depression type event and why are finance YouTubers constantly saying that the collapse is just around the corner? Oh wait, that’s just for views but what about the first point? What do companies know that we don’t? Is all of these stock rallies just a fake out before we plunge far deeper into a big bad recession? Or has this market correction simply been vastly overhyped since the very beginning? Join me as we uncover the truth behind the 2023 recession: aka the great reset.
First of all, we are not in a recession. Economically speaking, a recession is defined as 2 quarters of GDP decline. This is the graph of America’s GDP over the past 5 years. Clearly, there has been no such decline since the beginning of the pandemic. But, wait a minute, weren’t we in a mild recession in 2022? I swear there were articles claiming that we were officially in a recession. Well, there actually weren’t any articles that were claiming that. If we set our search time frame to the second half of last year and look up “US enters a recession”, we’ll see that every single reputable news outlet framed the topic as a question as opposed to a statement of fact. The ones that were claiming it as fact were actually just YouTubers. Now, there was some truth to what they were saying.
What these guys were looking at was real GDP or inflation-adjusted GDP where there was indeed a substantial decline from $20 trillion to $19.9 trillion or a whopping 0.5%. As you can see, the decline was virtually nothing. For perspective, the covid recession was nearly 10% but that’s just the most blatant issue with calling this a recession. For starters, even by the traditional definition, a recession refers to a nominal GDP decline, not an inflation-adjusted GDP decline. This is why the 2020 recession is highlighted with a gray bar while the supposed 2022 recession is not. But more importantly, this rule is just a general idea. If there are two consecutive quarters of GDP decline, then hey, maybe the economy is not doing so great. But, the reality is that there are so many more factors that are needed to gauge real economic health than just GDP. For example, you may also wanna consider the unemployment rate, non-farm payroll, industrial production, and retail sales just to name a few. Here’s a graph of unemployment for example. Nearly at all-time lows. So, objectively speaking, we were never in a recession in 2022 but what about looking forward? What about the 2023 and 2024 recession and the great reset? Well, every day, that’s looking less and less likely as well. For a recession to happen, we would first need to build up some negative momentum. You know, things like increasing unemployment, more layoffs, lower salaries, and so on. But not only is this not happening, but the exact opposite is happening.
We’re gaining positive momentum. Layoffs have substantially slowed down with the peak being back in January. In fact, the layoffs this June were actually lower than the layoffs last June. Payroll growth has also gained some positive momentum with April and May being positive months. Also, as we touched on at the beginning, inflation has cooled off quite well and blue chip stocks are doing better than anyone expected. With that being said, the general fear was simply a case of the general public eating up media and YouTube fear-mongering but what about big tech stocks? Initially, these got destroyed due to big money selling off. These guys clearly have more insight than the general public right? Why were they so scared of a potential recession and especially interest rates?
INTEREST RATE HIKES DEBUNKED:
By far the number one thing that was referenced as the big tech company killer was rising interest rates. Basically, the entirety of big tech happened within the past 15 years during which interest rates were literally 0. So, there was a lot of anxiety regarding how high-interest rates would affect these massive growth companies. But there’s just one fatal flaw with this concern. Most of the biggest tech companies in the world are no longer growth companies, to begin with. Yes, they still put up insane growth numbers year after year but that’s not at the cost of profit. Traditional growth companies sacrifice profitability to achieve growth. Likely the best examples are Uber and all the food delivery apps. But, this is not the case with Google or Apple or Facebook, or Microsoft. I’m sure you already know how profitable these companies are but let's go through their annual net profit for fun. Apple, $112 billion. Microsoft, $85 billion. And Google, $71 billion.
Do you really think these companies are suddenly at risk due to interest rates rising from 2% to 5%? Of course not and this has become abundantly clear within the past 12 months. Take Apple for example. They have a total of $100 billion in debt. For one, most of this debt was locked in a year ago, so it’s not like Apple is having to pay a whole lot more all of a sudden. But even if we assume that all of Apple’s debt was affected by the interest rate hikes, it’s not that big of a deal. Even if Apple’s rates got hiked from 2% up to 7%, we’re only talking about an extra $5 billion. It’s crazy to refer to that as only but at Apple’s scale, it truly is just only. With $112 billion worth of annual profit, an extra $5 billion would only reduce their profitability by 4.5% and that’s if the interest hit their bottom line directly. You can bet that they’re gonna write the interest off on taxes, so the real cost to profitability would be like 3%. In other words, most of the big tech companies are completely unaffected by the rate hikes. Now, if we’re talking about SPACs and hype plays, that’s a whole other story, but to be honest, those deserved to get wrecked.
Companies with strong fundamentals really had no issues but that’s only half the puzzle. The other argument was that investors would no longer be interested in these companies. When you can make 5% guaranteed by lending to the government or 7% by lending to big corporations with bonds, why in the world would you invest in stocks? Well, this does have some truth to it. If you’re a conservative investor, the answer is no reason at all. Statistically speaking, the average investor has no chance of beating average market returns of 7 to 8%. So, if you can get nearly the same thing with bonds, why invest in something that’s far riskier? Well, the answer is that that’s literally the job of most of the big money. While they suck at beating the market, their job is to indeed try to beat the market. The best way to do that over the past 10 years was to invest in big tech. Will this work again? Well, no one knows especially with AI making big leaps. But, one thing is for sure, a lot of big money is rotating back into tech despite all the fear. But if there’s no recession and big tech companies are doing just fine, why in the world did we see so many layoffs?
Naturally, everyone associates layoffs with recessions. So, when even the biggest names started laying off, everyone assumed that we were surely in a recession or that we were heading into one shortly but that’s not actually the case. You see, much of the layoffs weren’t caused by some sort of macroeconomic trend but rather microeconomic trends within tech. By far the biggest factor throwing things off balance over the past few years was Covid. When Covid showed up and everyone hunkered down, they naturally flocked to things that they could do at home. This meant more time spent on Netflix, social media, smartphones, computers, and the internet in general. As such, the demand for these products skyrocketed. In fact, many tech companies had to scale their operations specifically to keep up with this demand. The problem was that many of these companies assumed that this was the new normal and that demand would continue to grow at this rate. As such, they hired a crap ton of employees.
Google’s employee count exploded from 118,000 to 190,000. Facebook’s employee count exploded from 45,000 to 86,000. And Amazon’s employee count exploded from 800,000 to 1.6 million. As you might guess, these guys were in for quite a rude awakening when people started spending money elsewhere. On eating out, vacations, music festivals, physical stores, transportation, and so on. People never stopped spending money, that’s why our GDP has continued to grow. But people did pull back on their tech intake whether that be in terms of time or money. This was especially true for pandemic-specific tech companies like Zoom which have simply gotten obliterated. At the same time that growth rates were slowing down, productivity numbers were also slowing down. You see, all of this crazy hiring naturally brought in a lot of subpar people into these companies. Existing employees also become a lot less productive because they had 10 job offers waiting outside, so they were by no means scared of getting fired. You also had all these movements like quiet quitting. Basically, all of this simply meant that these companies were dealing with more rest and vesters than ever. For obvious reasons, this puts companies at quite a big hiring disadvantage. Not only were they constantly having to offer larger and larger compensation packages but the employees that they were hiring were less and less effective.
It was a lose-lose scenario for these companies. Fortunately for them, layoffs gave them the perfect way to work their way out of this vicious cycle. So, all these layoffs that we read about on the news aren’t really indicative of the macroeconomic climate. It’s really just indicative of the tech world which did indeed have a correction coming off the pandemic high. Zooming out though, we’re not in a recession but a recession is inevitable. With that being said though, no one knows when that’s gonna be. When everyone thinks that it’s gonna be in 6 or 12 months, that’s how you know that it’s definitely not going to be in 6 or 12 months. You can’t expect a recession. If you expect a recession, you’ll do things to prepare for the downturn which will in turn prevent the recession from even happening.
Recessions happen when the general public is overconfident in the market which is definitely not the case right now. So, the best option is to just forget trying to predict the next recession and stick to a strong investment plan that works over the long term whether that be buying the S&P 500 or investing in bonds but that’s just what I think. Someone that’s actually facing a recession is TikTokers. Check out this article to learn more.