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Are We in a Recession?

Back testing economic events

Recent geopolitical events have put a ton of pressure on the economic strength of the most dominant nations in the world. The path of the U.S. markets compared to that of European markets has been questioned as well as the level of fear-mongering that should take place in both situations. The risk of a recession is at the forefront of today’s political environment, but certain powerhouses are facing more troubles than others. 

U.S. Economical Landscape 

Inflation and supply chain issues have haunted the economic stability of the U.S. economy over the past year; however, recent trends and new monetary actions point to a strong recovery. Employment rates are on the rise, especially as more women are reentering the workforce in the midst of the aftermath of Covid-19. The reopening of the economy has also led to higher wages for workers in the service/leisure industry. Although the demand for labor is at its peak and this new wave of labor force resurgence is a great building block, it will not rid the nation of inflation. 

Inflation has been increasing ever since the start of the pandemic and even more so since the beginning of the Russia-Ukraine conflict. The impact is seen on the food and energy sectors, in particular, has been dramatic, thus leading to constant rate hikes from the Federal Reserve. Supply-side issues have directly correlated to rising prices; therefore, the Fed must raise rates to slow down consumer demand, before it can lower them again. These hikes will not offer a complete fix to supply blockages, but they will affect the stock market and housing market in ways that are beneficial to the consumer. For example, the housing market will experience a cooling-off period where houses stay on the market longer and sell for less than before. 

To create long-term stability for employment and the commodity market inflation will ultimately need to be lowered. Rates could reach as high as 3.5 percent by the winter of next year, but that is no reason to panic as increasing rates result in the appreciation of the dollar. When the dollar appreciates, the relative price of domestic goods and services increases while the relative price of foreign goods and services falls. Experts believe that if the dollar appreciates by close to 10 percent it could have a significant impact on inflation rates and supply chain shortages. 

The Trajectory of the European Union 

The European Union could be in serious financial troubles, especially in comparison to the burdens facing the U.S. The EU has experienced negative rates since 2014; however, accelerating inflation may force a switch up. The result could be rate hikes matching the U.S. Federal Reserve. The recent energy crisis almost leaves them with no other choice, as the union’s reliance on Russian gas is far greater than any other country around the globe. 

The EU’s oil embargo with Russia has led to unprecedented hoarding, putting massive amounts of pressure on gas markets throughout Europe. The country most directly impacted by the geopolitical conflict is Germany. Germany, the largest economy in the EU, is extremely dependent on foreign supply for gas and energy. To make matters worse, there are no other countries that Germany could gain supply from to offset the imports usually received from Russia, thus the country is on the verge of an income squeeze. Costs are rising, profits and revenue are decreasing, and borrowing is getting much more difficult. 

Like Germany, the UK has experienced inflation spikes and labor shortages due to the ongoing commodity crisis. The markets are as volatile as ever and the nation’s GDP rates have been decreasing over the past few months. A major recession could be brewing within the European Union as its two greatest assets are taking historic financial hits. 

Investment Takeaway

The best strategy at this time is to invest with inflation, meaning finding out which sectors are growth declining (energy) and which sectors are growth advancing (leisure/service). Furthermore, since global rates are rising, the financial opportunities within emerging bond markets as central banks attempt to get ahead of inflation.

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