The labor market is robust

In most recessions, economic output and employment decline simultaneously. Lower revenue compels businesses to cut back on staff, which leads to higher unemployment. Ultimately, higher unemployment leads to lower consumer spending and that creates a vicious cycle.

In 2022, however, unemployment is still at a record low. The official unemployment rate in June was 3.6% – the lowest since February 2020. A robust job market is “historically unusual” during a recession, according to economists at Goldman Sachs.

This unusually strong job market could be deriving strength from another unusual source: corporate financial strength.

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Companies are cash-rich

Corporations see a decline in sales and earnings during recessions. That process may have already started. However, U.S. corporations are sustaining profits and sitting on an immense cash hoard going into this recession.

The average U.S. corporation’s after-tax profit margin is around 16% right now. In traditional recessions, this rate drops down to single digits. Meanwhile, these corporations are collectively sitting on over $4 trillion in cash. That’s a record level and also highly unusual for a recessionary environment.

Companies may have raised these funds during the era of easy money and low-interest rates over the past decade. Now, this cash is acting as a buffer and could allow companies to retain staff despite the economic slowdown. Rates are rising

Another unusual factor of this recession is the Federal Reserve’s hawkish stance. In most recessions, the central bank cuts interest rates and adds more money to the economy to stabilize it.

In 2022, however, the Fed has been aggressively raising rates to curb inflation. Considering the strength of the job market and corporate balance sheets, the central bank may have more reason to keep raising rates.

What comes next?

“This is unsustainable,” says WSJ’s Jon Hilsenrath. He believes that one of two things must happen to resolve this misalignment: either the economy recovers swiftly, ending the recession, or the economy keeps dipping, compelling employers to cut jobs.

These two scenarios could potentially be the “soft landing” and “hard landing” the Fed has previously mentioned. Investors need to keep an eye on all indicators to see which scenario is playing out because the impact could be severe.

This could be an ideal time to bet on beaten-down growth and tech stocks if a soft landing occurs. However, in a hard landing investors may need to take refuge in asset-backed defensive stocks like healthcare companies and real estate investment trusts.

In either case, 2022 is shaping up to be an interesting year for investors.

Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

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About the Author

Vishesh Raisinghani

Vishesh Raisinghani

Freelancer

Vishesh Raisinghani is a freelance contributor at Money Wise.

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