HH #11

Which direction are we going? Did we avoid a recession all together?

Full disclosure, this edition’s market update is largely based on my internal view of the state of the market; nonetheless, there are plenty of true facts scattered throughout.

Let’s dive in with some macroeconomic discussion:

1. The S&P has recovered 20% since October 2022 - a classic indicator of a bull market

2. Consumer confidence has risen as most people seem to be generally optimistic about the U.S. economy

3. U.S. - Chinese relationships have steadily tanked since the outbreak of the Covid-19 pandemic in 2020

4. Bankruptcies and default rates have risen exponentially YoY

The notes above may seem conflicting, yet they are entirely true. The markets appear to be leaking polarized data. On the positive side, investors have been piling into equities over the last ~9 months as there is excitement surrounding each release of economic data (slowing inflation, rate hike pause, rising consumer confidence, etc.).

Now, I question whether these marginally improved pieces of U.S. macroeconomic data are truly the only drivers behind positive investor sentiment.

Equities have risen across the board, but no one was all that interested in investing in anything prior to this AI craze. To me, this AI craze is very similar to previous infatuations like cryptocurrency and SPAC deals. However, unlike crypto, people can mostly understand what AI is and experience its tangible impact; I’ve dug deeper into this in previous HH updates. So, the takeaway is that AI and generally positive macroeconomic data has definitely fueled some % of the market’s 20% rise since October. But surely those factors alone cannot justify these heightened valuations. An interesting behavioral aspect that could be at play here is the market’s continued ability to ‘act quicker, be smarter.’

‘Act quicker, be smarter’ pertains to the market’s ability to react to information and also anticipate the reactions of others to that same information. For example, if the FED says they are pausing rates then investors will jump to buy equities and “price-in” that information within minutes. 50 years ago, it would have taken hours to “price-in” that information. 100 years ago, it would have taken days. Thanks to developments in trading tech, all information can be “priced-in” almost instantaneously; therefore making the markets more efficient. Yet, no one seems to be discussing how ‘act quicker, be smarter’ could be a reason why we may avoid the recession everyone was discussing ~9 months ago.

Everyone knows to buy low, sell high. So why would investors not be collectively buying at the peak of recessionary discussion? In essence, anticipating each other’s next move with a perfect counter move. In October, investors could have been thinking “hey, I’m going to buy now because everyone else has been selling and recessions never last forever.” No investor would ever be able to perfectly time the market bottom or market peak, but they can likely get closer with practice and learning. My take is that it is entirely possible we will dodge a true recession purely because investors have jumped the gun to be aptly positioned for the next bull market. As investors embrace ‘act quicker, be smarter,’ they will effectively shorten the duration of business cycles (ie; recessions and bubbles will be shorter).

That concludes my rant about ignored behavioral undercurrents that can have huge effects on the market. Back to the facts.

The aforementioned data is largely positive, but there is plenty of data being released that should be glaring signals of an uncertain economic future. For starters, relations with China are clearly at rock bottom. No China = rising cost of most goods + struggling supply chain (many international seaports are owned by the Chinese). These relationships have soured ever since the U.S. and China blamed each other for starting the pandemic in March of 2020. Since then, everything has been tit for tat. We place a tariff on Chinese imports, they start banning U.S. business. As long as this does not lead to WWIII, everything will be fine. Definitely something to keep a close eye on.

It is also worth keeping a close eye on bankruptcies and default rates across corporations. In the U.S., we have seen 324 bankruptcies since January which is almost as much as all of the bankruptcies seen throughout 2022. If you’re remotely interested in credit or restructuring, it would be wise to really take a look at the types of companies falling into these struggling categories as a result of the FED hiking rates at such a fast pace.

Banking: A few smaller boutiques have opened up their SA apps including Founders Advisors and FMI Corporation. Some larger banks such as Credit Agricole have also extended their application deadlines. From the full-time perspective, none of the BBs or EBs have kicked off recruiting, but a few more smaller shops have opened their apps.

Consulting: BCG and Bain closed their first rounds. Bain has opened up their second round app, but BCG has not updated. No new boutiques in this update. Expect to see more apps in the end of July/beginning of August.

Buyside: Big update for the buyside in this edition. Bain Capital, Bessemer Ventures, D.E. Shaw, Vanguard, and many other middle market firms have opened up their SA apps.

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