The Recession That Never Happened: What’s Stopping the Collapse?

What would it take for the most hated bull market to end, and for the most anticipated recession to begin? If you’re a true contrarian, then you’ll intuitively understand that stocks won’t fall until the pundits’ persistent calls for a crash are finally silenced.

In other words, the crowd is consistently wrong in its predictions and it’s been calling for a recession since 2022. They’ve been digging in and doubling down on their crash calls even while the stock market has climbed for five consecutive months.

They’re visibly frustrated when the market continues to diverge from the economy’s fundamentals. They’ll complain about P/E ratios being too high and the handful of “Magnificent Seven” tech stocks pulling entire indexes higher all year long.

These are legitimate complaints, but they’re only adding fuel to the proverbial fire. Yes, banks are tightening their lending standards and that’s bound to inhibit economic growth. And yes, a deeply inverted Treasury yield curve has consistently preceded recessions on the U.S.

However, recessions and stock market crashes don’t happen when too many people expect them. You’ll get a quick dip, like the single-day stock market rout the day after Fitch downgraded America’s credit rating, but you won’t see a meaningful pullback in share prices.

Courtesy: Daily Shot, Bloomberg

As the old saying goes, the market can stay irrational longer than you can stay solvent. In modern terms, this means that the yield curve can stay inverted and stocks can remain overbought longer than you can afford to stay on the short side of the trade.

This is why short-selling the stock market is such a dangerous game. You can short the market and be “right” about fundamentals but still end up losing a ton of money because equities prices continue to levitate for seemingly no reason.

Yet, there is a reason. When so many speculative traders are positioned against the stock market, that becomes the crowded trade even if share prices are elevated. Fitch’s downgrade of the U.S. government’s credit rating from AAA to AA+ only serves to delay the recession that should have been declared at least a year ago.

Just recently, Invesco global markets strategist Brian Levitt declared that the U.S. economy was headed for “the most anticipated recession you could imagine.” Levitt is only one of many commentators predicting a downturn in the economy.

In late 2022, recession warnings came from mainstream journalism outlets like Forbes, CNN, and CNBC. Meanwhile, the Conference Board pinpointed the probability of a U.S. recession at 96%. As it turned out, that was a great time to buy stocks as 2023’s first half delivered huge gains for shareholders.

When the recession refused to happen as anticipated, the Associated Press declared that the recession is “now expected to start later than predicted.” That’s a great way for the media to admit it was wrong without actually admitting it was wrong.

Courtesy: Isabelnet, Deutsche Bank

Again, it’s trader positioning that matters in the short term, even if fundamentals matter in the long term. By the time the stock market’s weighing machine pulls share prices down, months’ and years’ worth of returns will have passed you by.

And right now, the perma-bears are still feeding the machine that fuels the rally. In one example, mortgage giant Fannie Mae just proclaimed that a recession is still coming at the end of this year.

As long as these bearish calls keep coming out on a weekly basis, the recession will be delayed even if it’s inevitable. There will always be a recession sooner or later, but trying to time it is a challenging and vexing game that most people shouldn’t play.

Hence, it’s still fine to buy stocks as long as you’re picking and choosing the best of the bunch. I’m not buying the entire S&P 500 as there are many duds in the 500-stock basket that I don’t want to be exposed to.

Besides, there’s no law saying you have to be 100% allocated into large-cap stocks. There are plenty of ways to diversify your portfolio, and Crush the Street has articles and special reports to give you ideas and help you identify market sectors that aren’t crowded yet, but will be someday.