“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
- Mark Twain
Ever since Google transformed from a company name to a commonplace verb in the dictionary, the ease and accessibility to find out what’s happening in the world and what is trending has been a modern marvel. Sometimes the latest search trend is trivial (are people really eating Tide laundry pods?), while at other points the latest fascination has a more material effect on our lives. As the U.S. trade war continues to dominate headlines, and long-relied upon signals such as the yield curve have flashed warning signs, concerns over a recession have spike in news stories and Google search trends.
Given the spike in recession fears, it is helpful to pause and reflect, and assess the question of whether we are on the cusp of a prolonged economic downturn. In our conversations with clients, we often point out that the economic cycle is not getting any younger. We are 10 years into the current expansion and some of the classic indicators that an economic downturn could occur have started to appear:
Longer term bond yields have fallen below short-term yields, an event that has preceded all prior recessions.
A prolonged and unpredictable risk factor (trade war with China) has significantly weighed on corporate sentiment.
Equity returns are positive, but volatility is becoming more prevalent.
The prior factors have all led to a renewed fear about an recession, despite global stocks returning over 10% year-to-date. As we noted last month, we would caution investors to evaluate recent fears about an imminent recession within the context of current economic conditions. Yields are inverted, yes, but with unprecedented global central bank action being a major force behind long-term yields falling to record low levels.
Second, the Federal Reserve has shown a strong commitment to keep monetary conditions fairly accommodative. In previous instances when the yield curve inverted, it was due to the Fed hiking interest rates into the face of an economic slowdown. The insistence on hiking rates choked off corporate investment and consumer spending, thus exacerbating the risk of recession by hurting borrowing conditions. In today’s market, companies can still borrow money (Apple just issued 10 year bonds at a 2.25% rate), and consumers can still purchase major items at a low cost (Chevrolet, Ford, and others are offering 60 month new car financing at 0.00%). Clearly lending and borrowing are still being done with ease today.
As we manage portfolios, we remain vigilant with respect to allocating investor funds conservatively and acknowledge that recessions are unavoidable. The continued trade war with China remains the biggest risk for starting a recession, as the current stalemate is creating a clear overhang on corporate spending. If further retaliatory measures are taken by each country, particularly as tariffs begin to impact consumer goods such as phones and clothing, then the one resilient area of the economy (consumption) will be hit and a slowdown is all but a given. However, the accelerating trend in concern over an imminent recession occurring may be a bit overdone given the balance of positive consumption factors also influencing economic growth. There is a case to be made for continued upside, which necessitates exposure to risk assets. However, we will continue to incorporate more defensive elements such as quality, shorter-term bonds and high-yield defensive stocks to better insulate against a recession when it inevitably occurs.
Investment advisory services offered through Independent Financial Partners, a Registered Investment Adviser
WhartonHill Investment Advisory is not owned or controlled by Independent Financial Partners
The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All data via Bloomberg, the Federal Reserve, and the Wall Street Journal