It’s officially Autumn! Now we turn to prepping for the holiday season. Also, it may be of interest to read the daily headlines of breaking news items.
It’s been another interesting month and many conflicts are bubbling. Consumer confidence index falling, Washington, Iran and China news dominate the headlines. The global economy is vast, but trade concerns have translated into a slowdown in global markets. This slowdown is manifesting itself in weakness overseas and constraining the U.S. stock market upside.
Many recent financial articles have conjectured about the U.S. stock market at recent highs and what’s in store for the 2020 market. Recent surveys of economists and Chief Financial Officers indicate that forecasters and finance professionals are becoming more pessimistic about U.S. economy and stock market1,2.
The latest Duke CFO Magazine Global Business Outlook survey shows that five times as many CFOs became pessimistic over the past three months as CFOs who became optimistic. The director of the survey, John Graham, stated that this decline is more than just “noise” and has been an accurate predictor of hiring trends and growth of gross domestic product (GDP).
The National Association of Business Economics3 surveyed economists and reported that nearly 3 out of 4 economists expect a recession by 2021. Back in August, Ray Dalio, a highly-regarded hedge fund manager indicated that he’s raising his estimate to 40% that there’ll be a recession before the 2020 election. Other big money investors are taking note of economic trends and heading to cash. The 2019 UBS Global Family Office Report detailed expectations of high net worth investors. The report declared a majority of respondents expect the global economy to enter a recession by 2020. It also noted that 42% of family offices are increasing cash reserves4.
Moreover, the public has taken notice. A quick review of Google Trends bears this out. Google searches for the word “recession” have jumped significantly in August 2019 versus the prior five years.
Stock market volatility and the steep correction late last year, the recent slowdown in U.S. economic activity, and an inverted yield curve have all contributed to worries about an economic downturn.
Plus, the economic expansion which started in 2009 recently passed its 10-anniversary. Recessions are a part of the business cycle in a free market economy. But expansions don’t simply peter out. Expansions come to an end when economic and financial imbalances arise, such as a stock or housing bubble, or the Fed aggressively hikes rates in response to a spike in inflation.
Contrary to the more traditional definition, a recession is not defined as two consecutive quarters of negative real (inflation-adjusted) GDP. If that were the case, we would have narrowly missed a recession in 2001. Q1 and Q3 posted negative numbers. Q2 was positive (via St. Louis Fed).
Instead, an organization called the National Bureau of Economic Research (NBER) has become the official arbiter of recessions. Founded in 1920, the NBER is a private, nonprofit, nonpartisan organization dedicated to conducting economic research.
The NBER defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months4.” It manifests itself in the data tied to “industrial production, employment, real income, and wholesale-retail sales.”
These are very broad categories. They are not tied to one or two sectors, which might be experiencing weakness at any given time.
For example, during a recession, we’d expect to see declining retail and business sales. This would lead to a decline in industrial production and a rise in the unemployment rate.
It’s not as if the NBER confirms a recession has begun shortly after it begins. It took nearly a year for the NBER to confirm the last recession. By then, it was a forgone conclusion. A similar delay occurs when the economy begins to recover, and the NBER is tasked with calling the end of the recession.
Even if an economic slowdown doesn’t become a recession there are plenty of reasons for concern. For most Americans, job insecurity increases, layoffs rise, and it becomes much more difficult to find work.
For investors, it’s a time of heavy uncertainty. With a recession, we can see Bear markets – a 20% or greater decline in the S&P 500 Index– as corporate profits decline and companies warn about the future.
These are all factors for the stock market health and warrant close scrutiny. A good starting point is reviewing your Risk Tolerance and, if necessary, revising your “pain points”.
This is not a call to time the market, something I don’t recommend. It is only a prompt for understanding your own circumstances and what fits best for your current situation and the next 5 to 10 years.
Having a conversation about the headlines which may be troubling you and how it impacts your portfolio is what I’m able to facilitate. You may decide that current conditions are suitable for your time horizon. Or you may decide, like the families and investors in the family offices, that a move to cash is appropriate.
- MarketWatch, September 21, 2019, Mark Hulbert, Opinion: Two-thirds of these corporate insiders now expect a U.S. recession by end of 2020
- Washington Post, August 19, 2019, Jonnelle Marte, 3 out of 4 economists predict a U.S. recession by 2021, survey finds
- Bloomberg Business, September 23, 2019, Suzanne Woolley, World’s Wealthiest Families Are Stockpiling Cash as Recession Fears Grow