Equity and bond markets can’t agree on one basic question this year: is the economy headed toward recession or not? US equities, which were up more than 20% through the end of Q3, seem to be brushing off signals that the economy may be slowing while bonds, up more than 8% (corporate bonds more than twice that) through the same period – far better than their stellar performance during the 2008 credit crisis – seem to be pricing in a sharp recession.
The current economic expansion entered its 11th year in July (the longest in recorded history) and there are currently enough early warning indicators of recession to justify a quick look at what that means for markets and your portfolio. What is a recession and why do they happen?
After the brutal flogging the market took late last year, few expected such a strong start to 2019, with world equity returns registering one of the best first halves in more than 20 years. Also notable, however, was the backdrop of deteriorating economic growth and softening earnings data during the period.
As we discussed in our last letter, the sudden plunge in equity markets in Q4 seemed to be at odds with the solid economic fundamentals in the US at the time. Since then, the soft patch in data we witnessed in January and February – data that seemed to confirm the recessionista’s worst fears - has turned out to be a passing phenomenon, largely attributable to severe winter weather and the prolonged government shutdown. The soft data have been replaced by robust economic numbers in retail sales, employment, industrial production, and wage growth, while inflation remains tame.
When the market plunges, investors immediately begin searching for a new narrative to replace the old one. In Q4, the narrative of solid economic growth and earnings, low inflation, a robust job market and improving wages quickly gave way to one of too much Fed tightening, slowing global growth, escalating trade frictions with China, a strong dollar, stretched valuations and an impending recession. All off this in the course of less than one week. This sudden change in storyline belies the fact that large, open economies – unlike financial markets - simply don’t roll over that quickly.
The spat between the US and Turkey is currently roiling various markets, with the greatest impact being felt by other emerging market economies. While there are fundamental reasons to be
If you’re wondering what is driving markets right now you’re not alone. 2018 has been characterized by a lot of noise and the pace of today’s news cycle makes it seemingly impossible for markets to fully digest current events before new ones crowd out yesterday’s news.
Strong wage growth in January ignited inflation concerns and sent equity markets tumbling Talk of tariffs and trade barriers in March further dented already fragile investor sentiment The
