Is a Recession on the Horizon - Interesting Article

Dated: 03/01/2019

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Is a Recession on the Horizon?

Sunrise over horizon

Frequent predictions that the economy is sliding into recession may be making you wonder if one is around the corner. Fortunately, an upswing in recession predictions doesn’t produce an actual recession. While many indicators point to a slower pace of U.S. and global growth, very few suggest a contraction lies ahead, which is why we don’t think one is likely. We expect modest economic and earnings growth with still-low inflation, which is a positive environment that can support rising stock prices globally over time.

Growing but slowing

This long-running economic expansion got a boost in 2018 from the impacts of the federal tax cuts, pushing growth above 3% for the past three quarters. As the pace of economic growth slows to near its 2.3% average, however, recession predictions pop up. Historically, expansions haven’t died of old age – they’ve been killed off by rising inflation, sharply higher interest rates or an external shock, which aren’t today’s conditions or main concerns.

Many, but not all, economic recessions are preceded by bear markets (downturns of 20% or more), so recession forecasts can make investors wary and cautious. In our view, the chances of recession have risen slightly but are not high enough to dampen our generally positive outlook for global equities. And keep in mind that when stock prices fall more than fundamentals change, which we believe to be the case today, this can create opportunities to add attractively priced equity investments.

U.S. Economic Growth chart

Source: St. Louis Federal Reserve

3 Supports for U.S. growth

Many reports suggest slower but still-solid growth ahead:

  1. Job growth and rising wages – With almost 7 million job openings, more than 2.6 million jobs added in 2018 and wages rising about 3%, the employment picture continues to look good, supporting solid growth in consumer spending.
  2. Manufacturing expansion – Industrial production rose 4% over the past year, and the manufacturing PMI (Purchasing Managers Index) has continued to indicate expansion. Although services make up about 80% of the overall economy, manufacturing and other cyclical sectors have an important effect on the pace of growth.
  3. Supportive monetary policy – The Federal Reserve has said it does not want to slow the pace of growth and therefore plans to remain patient and cautious when deciding whether to raise short-term interest rates in the future.

The high level of economic policy uncertainty globally – including trade and tariff disputes, the federal government shutdown, Brexit and other political risks – is likely to keep markets volatile. But the underlying fundamentals of modest economic growth and solid earnings growth can help stocks continue to rise over time, a positive environment for investors.

Global slowdown

Slower-than-expected economic growth in China and Europe has led to worries about a global recession. But the International Monetary Fund’s 3.5% growth forecast for 2019 is in line with the average pace of global growth from 2012 to 2016 rather than a recession. In addition, China and other countries have announced stimulus policies, which could improve prospects for growth later this year, and overall monetary conditions remain supportive globally.

Many investors have focused on global policy risks, resulting in an overly pessimistic outlook for global growth, in our view. Low valuations have created attractive investment opportunities in developed and emerging-market equity investments if appropriate for your situation.

Volatility and opportunities ahead

As markets adjust to expectations for slower growth, they tend to overreact, resulting in bigger moves both up and down – which is why we see more volatility ahead. Despite some weaker indicators, the underlying fundamentals of economic and earnings growth still look positive, so consider adding attractive investments at lower prices during pullbacks. We recommend you keep your portfolio prepared for higher volatility with the right mix of equities and fixed income for your situation, goals and comfort with risk.

What is a recession?

Although many experts define a recession as two quarters of negative growth, the National Bureau of Economic Research sets the official start and end dates for U.S. expansions and contractions. The NBER looks at changes in indicators including inflation-adjusted gross domestic product, income, employment and industrial production.

Historically, the stock market has peaked an average of seven months before the start of a recession, making it one of several leading indicators of economic contractions. Since 1954, the economy has enjoyed seven months of expansion for every month in recession, showing that recessions occur regularly but not frequently.

Important Information:

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

There are special risks inherent to international and emerging market investing, including those related to currency fluctuations and foreign political and economic events.

Past performance is not a guarantee of what will happen in the future.

Article from Edward Jones - By: Kate Warne, Ph.D., CFA

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