Who Will Crack First: Markets or Consumers?


While inflation continues to rise and cause the economy to weaken, you wouldn’t know it from looking at various economic measures. Stock markets, for instance, have now largely shrugged off their fears of a deepening war in Ukraine and seem poised to climb back to where they were a few weeks ago. And despite rising prices, consumers seem intent on spending money just like they always have. But will this last forever?

No one seems to want to admit that the US economy could be on the verge of a recession, but an increasing number of indicators are pointing to just that. And when it does, the good times will come to an end.

The question that poses for you is: are your investments prepared for another recession?

High-Flying Stock Markets, But for How Long?

Stock markets took a tumble when Russian troops first invaded Ukraine over a month ago, but since then they’ve seemed to shrug off the possibility of further geopolitical turmoil. The war doesn’t appear to be growing either deeper or wider, and it could result in a low-intensity stalemate akin to the post-2014 situation in eastern Ukraine.

Because of the perception that the war won’t intensify, stock markets have largely discounted that risk and are climbing once again. In fact, some Wall Street analysts think this could be the last big run up in value before stocks correct once again.

Markets over the last few years have been unusually nonreactive to events that would normally panic investors during normal times. They have bounced back from COVID lockdowns, war, and are even apparently unconcerned about the threat of higher inflation. It’s almost as though stock market investors today think the good times will never end.

Of course, that’s a common attitude among investors at the peak of a bubble. Many investors thought in 1929 that stocks would keep on rising ever higher. The dotcom bubble euphoria was similar, in that investors also thought we had reached a new era where parabolic stock growth was the norm. And today a new generation of investors similarly seems to believe that stocks can go up permanently.

Part of that has to do with their confidence in the Federal Reserve System and the job it has done of pumping vast amounts of money into financial markets. The more money the Fed injects into the economy, the higher stock markets rise. But now that the Fed is winding down its asset purchases, markets still don’t seem to be worrying about falling stock prices.

Many people understand that this can’t last forever. Stocks are so overvalued now that at some point the end will have to come. Those who want to sell high aren’t going to find willing buyers, and prices will have to correct. But how much longer will it take for that to happen?

Every time we’ve expected a stock market crash over the past few years, the Fed has stepped in with more money to paper over the problems. And stocks have risen ever higher as a result. Will the Fed step in to try to paper over the next crisis? And will that even work? Or will the Fed stick to its planned rate hikes and allow markets to follow their natural course?

Consumers Are Still Spending… For Now

Consumer spending received a significant boost over the past few years, as generous stimulus payments made their way into taxpayers’ bank accounts. But with those payments having come to an end, the jolt that gave to consumer spending seems to be wearing off.

Personal consumption expenditures actually declined slightly from November to December of last year before picking up again in January. That could be a sign that consumers are starting to tighten their belts ahead of expected higher inflation. With consumer spending being one of the biggest indicators of the economy’s health, any declines in consumer spending from here on out could be indicative of a coming recession.

But of course, why would consumers boost their spending? Prices for just about everything have soared to insanely high levels, stressing out people whose wages and salaries haven’t caught up yet.

Every time you go to the store or fill up your gas tank, you’ve probably noticed that prices keep creeping up. A few cents here and there and before you know it your grocery bill is 10-20% higher than it was last year. And the worst part is, it’s not stopping anytime soon.

Inflation is already at 8% year on year, and many experts expect it to continue to rise. It could very easily be at 9% by the time the Fed holds its next monetary policy meeting in May, which would put a lot more pressure on the Fed to keep hiking rates.

But in the meantime, consumers are going to start facing some tough choices. They’re no longer getting handouts from the government, and the reality of rising prices will result in having to make tough decisions about what to keep buying and what not to buy.

If consumers stop spending as freely as they have been, and high inflation is likely to cause that to happen, then many businesses will be affected from that drop in consumer demand. It could lead to the recession that many have feared for a long time.

The question now is, which will happen first? Will stock markets drop or will consumers stop spending? Right now everything seems to be going gangbusters, so what will be the first domino to fall?

Stocks a Lagging Indicator

In all likelihood, consumer spending is going to be the first indicator that something is wrong. You’ve probably already been affected by inflation and have been forced to tighten your belt. Replicate that decision times millions of people and you start to see some real changes in the economy, but it takes a while for that to become obvious.

It can take even longer for stock markets to pick up on that too. Remember that in the months before the 2008 financial crisis, stock markets remained high for quite a while. They peaked in October 2007 but they never plummeted early in 2008, even though the recession had already started in December 2007.

In early 2008 we were still being told by the Fed and Treasury that the economy was strong, it would remain strong through the year, and that any troubles in mortgage markets wouldn’t spill over into the broader economy. In reality, however, the spillover had already begun, but you wouldn’t know it from looking at stock markets.

All that is to say that if you’re looking to stock markets for clues of a coming recession, you’re likely going to be one of the last people to realize that a recession is underway. So if you want to protect your investment assets against recession, it can help to remember that, and to take action before stock markets crash in order to protect your assets.

Many investors remember 2008 vividly, unfortunately often due to the losses inflicted upon their investments. But many also remember the performances of gold and silver in the aftermath of the crisis, as gold nearly tripled in price while silver more than quintupled in price. And many people back then vowed that the next time a crisis occurred, they would be investing in gold and silver.

With the potential for recession on the horizon, isn’t now the time to start thinking about protecting your savings with gold and silver? If you’re nearing retirement, you can’t afford to take 50% or greater losses like many people experienced in 2008. You’ll probably want to protect the wealth you already have, which is why it makes sense to start thinking about investing in gold and silver right now.

Goldco’s representatives have over a decade of experience helping thousands of customers just like you protect their hard-earned savings with gold and silver. Call Goldco today and find out how you can safeguard your assets with gold and silver.

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About the Author: Trevor Gerszt