Category: Investments

Author: Tim Courtney

The Recession Question

Date: 07/09/19

The third quarter of 2019 kicked off on a positive note. On July 1, the S&P 500 surged to new highs and the Dow gained 117.47 points following President Donald Trump and Chinese President Xi Jinping’s trade agreement at the annual G20 Summit.1


While this favorable news temporarily put the market at ease, the fear of an upcoming economic downturn still lingers as a concern for many investors, especially because the Federal Reserve recently forecasted a 35 percent chance of a U.S. recession in the next 12 months.2


There are several conflicting data points regarding the strength of the U.S. economy. On one hand, the bond market is flashing warning signs that a recession is potentially near. The yield curve has been inverted for over three months, an occurrence that has been a precursor for the last seven U.S. recessions.3 Manufacturing data points are also starting to show signs of slight contraction after months of slowing growth.4

On the other hand, numerous market fundamentals continue to look healthy. The stock market has been behaving optimistically5 after the Fed took on a more dovish tone, combined with promising trade progress. Additionally, unemployment remains at a near-historic low6, consumer confidence has stayed relatively steady7 and defaults on lower quality corporate loans are not rising to worrisome levels.8


You don’t have to search long to find speculators forecasting a near-term recession. But there are a couple interesting notes about today’s environment that makes timing recession calls even more difficult than normal.


For one, this would be the lowest 10-year Treasury rate ever seen prior to a recession.9 In a typical cycle, you find that as a recovery continues, interest rates climb higher to a point that they begin to choke further economic growth. As borrowers can no longer afford the rates, they demand less borrowing, rates begin to fall and the economy begins to contract.


In this recovery, rates started low and ended even lower. Today we find ourselves in a situation with interest rates hovering at about 2 percent. Typically, interest rates within a range of 4 to 7 percent are what we tend to see before the economy falters.9


Furthermore, because of today’s low interest rates, it’s not evident where investors would put their money if we do in fact enter a recession. Investors often flee to bonds for safety in times of economic distress; however, investment grade bonds are currently yielding just 1.5 to 3 percent10 and do not present a viable alternative to stocks. Therefore, it is not at all clear that we would see a mass exodus from the stock market into bonds like we did in 200011 and 200812 when the markets declined 50 percent or more.


The bottom line is that recessions are hard enough to predict without considering the unique situation we find ourselves in today. Bond and stock markets are leading indicators but are not always accurate and are currently in disagreement.


Even if we do experience an economic downturn, it remains unclear how the market will react – the last two recessions occurred under vastly different circumstances and most market reactions to recessions are much less severe.


Sources:

1. CNBC.com – S&P 500 closes at new record as chipmakers get a boost from US-China trade truce
2. The Federal Reserve – Predicting future recessions
3. NPR – What just happened also occurred before the last 7 U.S. recessions. Reason to worry?
4. The Associated Press – US manufacturing growth slows in June for 3rd straight month
5. Yahoo! Finance – S&P 500
6. The White House – Unemployment still near historic low; Robust wage growth continues in May
7. FXStreet News – US consumer confidence: Still elevated, but below its 2018 high - Wells Fargo
8. J.P. Morgan - Market Insights
9. YCharts – 10 Year Treasury rate
10. CNBC.com – Bonds & rates
11. Investopedia – Dotcom Bubble
12. Investopedia – The 2007-08 Financial Crisis in review


PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971 


About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE