Every 'Employment Report Friday', the market always holds its breath for clues about economic trends. Recently, the U.S. economy seems to be on an unusual track. Although overall data has not shown a comprehensive recession, multiple industries have already entered a winter. Ark Invest founder Cathie Wood deeply interprets the content of the investment letter released, revealing the economy's 'rolling recession', the labor hoarding behaviors of companies, the double-edged sword role of AI and automation, and why the current sluggish sentiment may be the prelude to the recovery of the innovative economy.
Labor hoarding phenomenon: Businesses are still holding up, but pressure is brewing.
Although the employment report appears robust on the surface, this analysis points out that the reason companies have not laid off large numbers of workers is not due to economic strength, but because of the 'labor panic after COVID' that makes businesses reluctant to let staff go easily. Unless corporate profit margins start to decline significantly, a wave of layoffs is unlikely to occur. However, if the anticipated deflation trend materializes, marginal pressures will force companies to accelerate the replacement of labor with capital (such as automation).
Automation and AI: Creating jobs? Or replacing jobs?
Although automation and AI technologies have triggered a massive 'unemployment panic', this letter emphasizes that history shows technology ultimately is a net creator of jobs. The example of agricultural automation is the best proof that in the future, AI and robots will enhance overall productivity, benefiting the economy and labor market in the long run.
The truth about the rolling recession: Industries are 'lagging' one after another.
This 'invisible recession' has actually been underway for years. From the housing market, automobile manufacturing, manufacturing industries to capital equipment spending, all have fallen into stagnation or even contraction. High-end consumer spending and government expenditures, which were originally the last two pillars supporting the economy, are now beginning to waver.
Housing market: Affected by high interest rates, home sales have plummeted about 39% from their peak, and homeowners with ultra-low-rate mortgages are unable to move.
Automobiles: After a brief rebound, sales have once again turned down under the dual pressure of the pandemic and tariff policies.
Manufacturing and capital expenditure: Continues to be sluggish, recording the weakest performance since the expansion.
Small businesses and low-income individuals: Confidence is lower than during the pandemic.
The small business optimism index has fallen below levels during COVID, nearing the lows of the 2008 financial crisis. Consumer confidence has also generally declined, especially among low-income groups, who are deeply entrenched in pessimism and even expect a high risk of unemployment in the future.
Interest rates and monetary policy: The aftermath of the most aggressive rate hike cycle in history.
The Federal Reserve raised interest rates 22 times in 16 months, marking a historic first. Despite starting from an extremely low rate (0.25%), such a jump still has a tremendous impact on businesses and consumers, indirectly contributing to the so-called rolling recession. As the peak pressure from interest rates has passed, the market expects up to four rate cuts this year.
Yield curve inversion: The classic sign of a recession reappears.
Historical data shows that shortly after an inverted yield curve, economic recessions almost always follow. This time, the inversion has lasted longer, and now that the curve is starting to normalize, it may instead be one of the signals that a recession is already occurring.
Is deflation on the way? Market signals are pointing towards price declines.
Whether it's the leading indicator of consumer prices 'True Inflation CPI' or the velocity of money circulation, both indicate that economic pressures are accumulating. Especially with China's economic weakness and export deflation, this may pull the world into a deflationary environment. This will limit the Federal Reserve's room for further tightening, instead providing opportunities for growth assets.
Have the three major headwinds been lifted? The value of innovative stocks emerges.
This letter believes that the three major headwinds hindering innovative investment strategies: high interest rates, market concentration, and high valuations, are gradually dissipating.
Interest rates: Entering a rate-cutting cycle, favorable for growth stocks.
Market concentration: The bull market previously dominated by 'six major tech stocks' will expand to more 'true innovators' in the future.
Valuation pressure eases: The price-to-earnings ratio of innovative stocks has significantly retreated, nearing historical lows, indicating that 'innovative stocks are on sale.'
Bitcoin vs Gold: Which is the true safe-haven asset?
The recent surge in gold prices indicates that the market is seeking safe assets. However, Bitcoin and tech stocks have synchronized pullbacks, showing that they are still viewed as risk assets. Nevertheless, the long-term trend for Bitcoin prices remains strong, and it is expected to lead the way when risk appetite rebounds.
Will we emerge from a rolling recession through productivity recovery?
This lengthy economic and market observation summarizes the seemingly healthy but actually rolling recession landscape of the past three years, and points out that artificial intelligence and new technologies may trigger a new wave of productivity revolution and deflationary environment, paving the way for truly innovative companies and investors. In the coming months, it will depend on how the economy and market respond to this structural turning point.
This article Ark Invest | From 'Rolling Recession' to AI Productivity Recovery: Is the U.S. Economy Brewing a Structural Turnaround? First appeared in Chain News ABMedia.
