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Coming into the year, this question would have been dismissed as absurd. As I wrote back in January, the prevailing view in early 2015 was that U.S. growth was set to accelerate and that the U.S. was “decoupling” from the world. Challenging that viewpoint, I wrote the following:
“Collectively, these factors suggest that the U.S. is not immune to a global slowdown. Indeed, it is already starting to feel the effects if we look at anything except the S&P 500. From easy monetary policy to plummeting yields and inflation expectations, the U.S. looks very much like its global peers. Moreover, the widening of credit spreads and outperformance of defensive sectors suggest that market participants are already starting to appreciate this and position accordingly.”
Fast forward to today and we have witnessed slower economic growth in the U.S. and a number of industrial indicators to pointing to an increased probability of recession.
1) Durable Goods orders excluding transportation have declined -5.3% over the past year. Recession?
2) The ISM Manufacturing PMI has declined -13.5% over the past year. Recession?
3) Over the past 10 months, U.S. Capacity Utilization has declined -1.9%. Recession?
Based on the above evidence, the odds of a recession have certainly increased from where they stood at the start of 2015; it would be hard to argue otherwise. But there are no certainties when it comes to forecasting and predicting recessions is fraught with difficulty. There were many instances in the past where manufacturing/industrial indicators turned down without pulling the U.S. economy into a recession.
The strongest case to be made that the U.S. is not entering a new recession just yet is the strength in the jobs market and continued easy monetary policy. U.S. Initial Jobless Claims are at 42-year lows and the Fed Funds Rate remains at 0%, its seventh year at such levels. In the past, recessions have often been preceded by an uptick in Jobless Claims and a tightening of Fed Policy.
The U.S. stock market, too, appears to be pricing in a low probability of recession today. With the S&P 500 less than 2% away from hitting new highs, the consensus view is that the manufacturing/industrial downturn will be short-lived (mainly due to the fall in Crude prices, rise in the Dollar, and slowdown in China) and is not indicative weakness in the broader economy. The prevailing view here is that while U.S. growth has certainly slowed, this is merely a hiccup and 2016 will show a re-acceleration in growth.
If this increase in growth and inflation expectation comes to fruition, this would finally lead to the first Fed rate hike since 2006. Can the stock market can handle a hike or two or three? That remains to be seen, but it will be a welcoming question to be asking. For it it will mean the U.S. economy has not entered a new recession and that we have finally moved past the crisis-era monetary policy that persisted for seven long years.
The alternative, which some myopic market participants seem to prefer: continued economic weakness, no Fed hike and eventually QE4 – choosing what’s good for the short-term stock market over what’s good for the long-term economy.
With the stock market’s having more than tripled since 2009 and real economic growth still showing the most sluggish growth expansion in history (see chart below), perhaps it’s time to start focusing on and rooting for the latter.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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