Oil Price Down, Recession Likelihood Grows

Editor’s Note: What follows is the stock market and economic update portion of the November issue of Foundational Profits. That’s my premium monthly service where thousands of investors follow how I’m managing my long-term wealth. As you’ll see, the setup heading into 2024 for stocks isn’t great, which is why I have my wealth concentrated into five positions. You can see exactly how I’m positioned in the full issue here. 


— Nick

The US economy showed growth in Q3 driven mostly by government spending. 

The seasonally adjusted annual rate came out at 4.9% for the quarter. 

Real GDP - Percent Change from Preceding Quarter

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That growth will now slow significantly. The consensus estimate for Q4 GDP is 0.8%. And it’s lower than that for Q1 and Q2 2024 at 0.3% and 0.6%, respectively. That next-to-nothing growth could easily be negative growth. So queue up the revival of recession talk for the New Year. 

Right on time, U.S. manufacturing contracted sharply in October, marking the 12th consecutive month that the PMI remained below 50. That is the longest such stretch since the Global Financial Crisis in 2007.

ISM Manufacturing - PMI Composite Index Since 2000

And it’s not just the U.S. 

Chinese exports, a measure of global economic health, have fallen for six straight months, leading the Wall Street Journal to report on November 7 that: 

Diminishing exports show global demand for Chinese goods is subdued as consumers and businesses contend with slowing growth and higher borrowing costs. Other Asian export powerhouses, such as South Korea and Taiwan, have also reported months of feeble overseas sales.

The International Monetary Fund expects global economic growth to slow this year and next, as the impact of central banks’ aggressive interest-rate increases takes its toll. Most economists now expect the U.S. to narrowly avoid recession but anticipate a slowdown in the coming months.

Oil Price Down, Recession Likelihood Grows

It’s the reason we sold India on November 6, locking in profits on the Franklin FTSE India ETF (NYSE: FLIN) with me telling you via a flash alert that: 

India is up 1.8% since we entered it in early August. The S&P 500 is down more than 3.5%. Asia is now starting to weaken. South Korea went so far as to ban short selling (link). We will take our gains off the table by selling FLIN above US$31.60 while not having the current anxiety that comes with being long broad US indices like the S&P.

Oil, as I told you in the October issue, is on a short leash. I am watching the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) closely for a breakdown.

Speaking of oil, this slowing domestic and global growth is also the reason I have said for a month that oil was on a short leash. And now we have confirmation those suspicions were correct, with crude oil breaking down through what had largely been resistance around $82.30 for the past year, putting a $75-handle in play.

Oil Price - Nick Hodge's Foundational Profits

And this is why we are exiting our oil position by selling the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) above $140.00. 

Back to the macro, not only is oil pricing in slower manufacturing and slower growth, it’s now starting to price in the classic late-stage economic indicator of employment. Unemployment ticked up in October to 3.9%, the highest since January 2022, with nonfarm payrolls only increasing by 150,000 versus a 170,000 expectation. And a third of the jobs added were government hires. What’s more, there were downward revisions to the number of jobs created in August and September. The government has now retroactively downgraded payroll data every single month this year. 

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The last time there were that many consecutive downward revisions to payroll data was… anyone… Bueller… the Global Financial Crisis.

The stock market, naturally, went higher on the news that there are fewer jobs for Americans, leading the Financial Times to print the non-sequitur headline, “Wall Street records best week in a year after US jobs growth slows.” That article provided this lovely back and forth:

“This jobs report is… helping convince non-believers that this is very much the end of the rate hike cycle,” said Kristina Hooper, chief global markets strategist at Invesco. “We are very much in a disinflationary trend, the economy is cooling and the Fed does not have to hike rates again.”

But Thomas Barkin, president of the Richmond Fed, told CNBC on Friday that it was not yet clear if interest rates had peaked, adding that the timing of potential rate cuts was “still a ways off in my mind."

Your humble editor submits both Ms. Hooper and Mr. Barkin can be correct. Higher for longer rates satisfies his mind because a pause at the current elevated rate is certainly not a cut. And slowing growth via contracting GDP can beget the disinflation she sees. 

The problem is that when both growth and inflation are falling you can get significant downticks in commodity and stock prices with simultaneous issues in the credit market.

The remainder of this month’s Foundational Profits issue gets into exactly what you can expect for the rest of the year in the stock market and the economy as we head into Christmas. 

I look forward to what you can expect in the first and second quarters of 2024. We look at jobs, we look at GDP growth — or non-growth as it were. And we look at inflation.

And then I go through exactly how I'm positioned for the next couple of months. And this is a crucial juncture because we're at a time when not a lot is working in the market, whether that's stocks or bonds.

I can count where 75% of my long-term wealth is in five different positions. 

That means I'm highly concentrated in a couple of positions that I believe are going to insulate me from the additional downside that I expect in the stock market over the coming months.

You can see what they are in the rest of the November issue here.

Call it like you see it,

Nick Hodge

Nick Hodge
Publisher, Daily Profit Cycle