2018_11_19 — “You can still walk on crutches”
November 19, 2018
You can still walk on crutches
You can still walk on crutches
- Global growth is no longer synchronized
- Many EM markets, some developed markets, and many individual U.S. stocks have breached bear territory, down at least 20% from their most recent highs
- The U.S. is not falling into recession
- However, growth may decelerate enough to make people feel like the U.S. is in a recession
- U.S. indices may enter bear territory based on deceleration, not recession
For years after the great financial crisis, as the U.S. economy slowly improved, many people, workers, and investors perceived the economy to still be in the doldrums and felt like we were in a recession (even though we weren’t) because economic growth was so weak.
Over the next couple years, a combination of actions may decelerate U.S. growth enough — the run off of fresh tax cut stimulus, a decline in Congressional financial stimulus, burgeoning deficits, Fed rate hikes, and tariffs and trade restrictions — that even though GDP remains positive, many people and investors will perceive that we are entering a recession and act accordingly. Such overreaction may even be quite normal from a behavioral economics perspective.
Global growth is no longer synchronized. From early 2016 to early 2018, most major and emerging market economies showed positive actual growth as well as positive leading indicators from manufacturing and service sectors. However, as 2018 progressed, a pronounced global decoupling occurred, and may developed and emerging market countries slipped as the U.S. Fed rose interest rates and other countries couldn’t on a domestic scale match the U.S. government’s fiscal stimulus.
Many EM markets, some developed markets, and many individual U.S. stocks are in bear territory, down at least 20% from their most recent highs. And although the S&P500 is positive year-to-date, as of mid-October, half of the stocks in the S&P500 were down 20% or more from their all time highs.
The U.S. is probably not falling into recession, but barring another major fiscal stimulus or infrastructure project, economic growth will decelerate hard. By themselves, the fiscal, fed, and policy impacts probably won’t be sizable enough to force the economy into a recession. The U.S. should continue to operate near full employment and inflation remain positive. However, we are likely to reenter that feeling of living in an extraordinarily weak economy where even a small financial, market, or political shock might be enough to nudge the economy into negative growth. Therefore, people and investors may feel and behave as if in a recession. Thus, U.S. indices may enter bear territory based on deceleration, not recession.
As the title suggests, even with an injured leg, one can walk on crutches. With a little practice and agility, one can even walk faster than normal on crutches, even if the outside perception is that one is hobbled. As implied, the U.S. economy can continue forward, even with some impediments. Although the consensus view is that we will have a recession by 2020 — which is an easy way of saying that over the next couple of years some confluence of events can end our growth cycle — there is a decent chance that the U.S.’s current growth cycle extends into the mid 2020s.
Michael Ashley Schulman, CFA
Disclosure: The opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.