Are we already in a recession and which assets to trade?
By Paul Reid
24 June 2024
Though mainstream media hasn’t formally declared a recession yet, various key economic indicators suggest we may already be experiencing a global economic downturn. This unusual market limbo has caused confusion, and even losses for traders using traditional forecasting methods. It has also created attractive opportunities for savvy traders who have a wider perspective on 2024’s market dynamics.
Traders and investors commonly buy gold to hedge local currency devaluations, and even trade USOIL to offset rising fuel costs, but if a recession is indeed in progress, what should traders be looking at in the coming weeks and months? Let’s go over today’s signs of economic instability and how the markets may play out this year.
US debt and inflation
The US national debt has surpassed $34 trillion, raising concerns about the sustainability of government spending and the potential need for future tax increases or spending cuts. Inflation has been a persistent issue, with rates trending high for several years, despite efforts by the Federal Reserve to control it through interest rate hikes and quantitative easing. This persistent inflation erodes purchasing power and increases the cost of living, putting additional strain on households and businesses. The rising prices of essentials like food, housing, and energy further exacerbate the financial pressure on both companies and consumers.
Despite what mainstream media says, the US economy is far from solvent, so be extra cautious when trading USD-related assets.
Unemployment and migration
America’s job market is showing signs of weakening, with rising unemployment rates becoming a concern in previously robust sectors. Massive migration also affects the jobs market, as it places stress on public services and housing, leading to higher unemployment rates and increased competition for job vacancies.
>> See US Treasury Fiscal Data House and Budget Committee for a more detailed breakdown <<
The Fed continues to include those employees returning to work (post-COVID) as new jobs, bolstering the narrative of a strong US economy. But the reality is that small businesses are now struggling, high street stores are closing, and corporations such as Apple, Microsoft, and Google are dumping thousands of employees at an alarming rate.
Perhaps the tech CEOs see dark clouds on the horizon?
Global struggles
Economic challenges are not unique to the United States; many countries worldwide are facing similar issues. Europe is also facing a debt crisis, with several countries struggling to manage their national debts and budget deficits.
Inflation is a global problem, affecting nations from the UK to Brazil, causing central banks to adopt more aggressive monetary policies. Rising unemployment rates and migration challenges are also common threads, with countries like Germany, Italy, and Japan experiencing significant economic strain.
So what to trade in 2024?
With all this economic chaos and contrasting political narratives, it’s hard to trade with confidence. Some analysts believe we haven’t seen the worst of it yet. If USD is falsely inflated by soaring interest rates, that mechanism will break eventually. For now, big investors are happily holding USD because of the attractive interest rate returns, but this cannot last. It is estimated that the national debt is costing the Fed $1 trillion per year. An unimaginable burden for US taxpayers.
But if the Fed is planning to lower interest rates to curb inflation, it could put the greenback on crumbling foundations. For now, USD is inexplicably rising as we head toward US election day, but that might change if we see a new (or orange) face in the White House. Be ready for epic USD volatility leading up to November.
Shifting focus to stocks, we now suspect that electric vehicles (EVs) are a failed experiment. Fossil fuels feeding struggling power grids and toxic battery manufacturing materials are gradually turning green parties against EVs. Moreover, reports of diminishing range performance from all brands and models have prompted car companies to reduce EV production quotas.
It’s only a question of time before Tesla sales completely dry up. If the automaker doesn’t pivot into a more sustainable technology, TSLA will fall. Whenever market sentiment smells blood in the water, fallout quickly follows… the only question is when? Keep a close eye on TSLA trends.
Certain tech stocks remain high as the world embraces AI. Checking the charts, you may perceive the all-time highs of NVDA and AMD as a risky ‘long’ trade. Buying high is not a trader’s aim, but it seems unlikely that a reversal is coming soon. Be extra cautious of buying tech stocks right now, unless a catalyst presents itself such as a stock split or product announcement of substance.
Moving to precious metals, gold is holding relatively stable in a high range, but any signs of weakness from USD may push XAU even higher. There’s no logical reason to expect a price decline from gold anytime soon. Often, high interest rates on USD would cause big investors to migrate to bonds, but interest rates are already high and need to come down. Monitor the Fed and be ready to trade gold.
USOIL is keeping a low profile in Q2. Dancing in its usual $65 to $85 per barrel range, the Middle-Eastern conflict isn’t showing a significant influence on prices… yet. Both trend traders and swing traders are seeing a very attractive trading landscape for USOIL.
Conclusion
While it may not be officially recognized yet, clear signs of a global recession are everywhere, but there’s one thing common to recessions and downturns that hasn’t happened yet—a stock market crash. In fact, world indices are enjoying highs and seem impervious to the economic struggles so many nations are facing.
If you are planning to short stocks, now might not be the time. Make sure your trading account is fully activated with sufficient equity to roll with market volatility… just in case. Be wary of tight Stop Loss and Take Profit, and consider using your risk-free demo account to test trading strategies if you are unsure. Lastly, only trade when fundamental and technical analysis indicates a similar outcome.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Author:
Paul Reid
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.