Introduction
A recession (i.e. two consecutive quarters of negative GDP growth) is coming. We guarantee it. Unfortunately, we do not know when. It is kind of like saying we know another hurricane will hit Houston. We know it will but we just do not know when. Recessions will continue to happen as long as economic data is tracked with some degree of certainty. With that being said, the better question to ask could be “What can help us identify the next looming recession?”
The Negatives
- Inverted Yield Curve: Parts of the yield curve inverted earlier this year. This means short term bonds were yielding more than medium term and long term bonds. Historically, this inversion of interest rates has happened prior to most every recession. With that being said, history tells us that an inverted yield curve does NOT always produce a recession. A good analogy would be… it always rains before a hurricane but rain does not always lead to a hurricane. The yield curve is currently very “flat” but NOT inverted.
- Commodities: The price movement of commodities over the past few months has historically weighed on future economic expansion.
- ISM New Orders: This is a number that reflects the manufacturing output here in the U.S. This indicator is less important than it was 20 years ago since our economy is more service oriented. We feel that this number is also under “pressure” due to the continuing trade dispute with China.
The Positives
- Healthy consumer: American households are in a strong financial position with robust balance sheets. Household leverage is the lowest it has been since 1985.
- Company Earnings: Earnings are definitely slowing but they still look healthy. We have written in the past that earnings growth could grow at a slower pace but this was to be expected.
- Corporate Balance Sheets: Large companies here in the U.S. are flush with cash.
A Look Back At 2008
We do not think the next recession will be as severe as the last recession of 2008 – 2009. The same logic applies to hurricanes… Houston is fearful that every hurricane will be like Hurricane Harvey. Humans tend to think in linear fashion – whatever has happen recently will continue to happen in the same way moving forward. We obviously cannot predict the future (our crystal ball is a little bit fuzzy) but we think the next recession will be more mild than the 2008 financial crisis.
Take Away
We remain vigilant in our study and due diligence to track economic activity and make changes as needed to help protect client capital. We remain of the opinion that a recession is not imminent. To be clear, we are not saying stocks will go up in the coming weeks or months. Corrections happen. But, given the level of corporate profits and our outlook for economic growth, we think that equities will move higher over the next 6 - 12 months.
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About The Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 9 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matt Price, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.