The long-awaited downturn in the U.S. economy may be nigh. A litany of weakening macroeconomic data this week is pointing to a slowdown in growth over the next few quarters.

 

Many in the financial markets, including me, have been anticipating this decline. I have predicted a moderate recession beginning sometime this year for many months now.  I am not alone. Many expect a much harder landing.

 

That will depend on the Fed. If the U.S. central bank continues to raise interest rates and is willing to forge ahead with further quantitative tightening, then Gross Domestic Product will fall further. The decline will only stop when the Fed stops. 

 

This week, the economic data has been uninformedly negative. The Manufacturing Purchasing Management Index PMI), the Institute for Supply Management (ISM) manufacturing data, February factory orders, the JOLT data (job openings), jobless claims, ADP employment, etc. — all indicated a downturn is coming.

 

The only data point that did not decline was Friday's non-farm payroll report jobs for March, which came in at 236,000 job gains (versus expectations of 238,000). That was basically in line, although the headline unemployment rate declined from 3.6 percent to 3.5 percent. The Fed will likely interpret that number to mean that their work is not done yet. They are hoping to see unemployment rise, although they dare not say so. Can you just imagine the response in Congress to a Fed statement stating they want more Americans to lose their jobs? 

 

The typical recession indicators are performing as they should. The dollar continued its decline, and yields on interest rates fell across the board.  Many growth sectors in the stock market sold off, while defensive areas such as health care and utilities climbed.

 

And then there was the performance of precious metals. Gold broke above $2,000 or ounce and June futures in gold reached $2,037. The all-time high in gold is $2,070, which was reached back in August 2020. I believe it is simply a question of time before that barrier is breached. Silver gained as well but has a long way to go before reaching its historical high.

 

Readers may want to revisit my explanation for gold's recent performance in my March 23, 2023, column "Gold as a haven." I wrote "…unlike bonds and stocks, gold has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government."

 

In my experience, most investors focus exclusively on gold as an inflation hedge. They fail to understand that the price of gold is influenced by several factors such as inflation, interest rates, the direction of the dollar, demand from central banks and commercial jewelry, as well as safety. While I continue to be bullish on gold this year, I do not subscribe to the "up, up, and away" optimism of many gold bugs.

 

I could easily see gold, falling back to $1,950/ounce in the short term if the dollar were to bounce higher. That said, the momentum that drove it higher this week should continue but it will be a wild ride and not for the faint of heart. The point is that a 2-3 percent position in gold for aggressive investors makes sense, but don't bet the farm on it.

 

As for the overall markets, expect the trading range that we have been experiencing for months to continue. We hit 4,100 on the S&P 500 Index, a big resistance level, and chopped up and down without making any real progress. This coming week, I expect more of the same until Wednesday's Consumer Price Index for March is released. A cooler number will bolster markets, a hotter print will not be taken kindly. A Happy Easter and Passover to all.   

 

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