Boom times don’t go on forever.
And the longest expansion in U.S. history may be over in 2020, some market observers recently said, as some are spooked by potential or actual bad times.
That’s because there’s “a fifty percent” chance of a recession in the United States by this time next year.
A Fork in the Road
The prediction of at least “a recession scare” in the first or second quarter recently came from two market observers on Legg Mason 2020 economic outlook.
“We think the recession risk has been rising over the course of this year,” according to Jeffrey Schulze, an investment strategist at ClearBridge Investments. “We’re at a fork in the road.”
Schulze added his firm has a dashboard of key economic indices. These include financial stresses, business activity, retail sales, jobless claims and inflation. They, along with profit margins starting to decline, show the economy is leaning in the direction of a recession.
“The overall signal, at the end of October, has turned to yellow, which indicates a rising recession risk,” he added.
The data often leads to a recession six to nine months afterwards, Schulze said. “We do think there will be a recession scare sometime in the first quarter or second quarter of next year,” he said.
On average, these signals turn yellow just before a recession, he noted. By contrast, almost every time the indications signaled red, the country did go into a recession.
Wait a Moment—We Might Be Wrong
Still, Schluze hedged his recession prediction and emphasized the central bank was a key in what happens in 2020. He said there were three recent times when indications were yellow, signaling recession. These were in 1995, 1998 and 2016. That’s when the economy also seemed poised for recession.
But the easy money policies of the Federal Reserve prevented recession, he said. And he added that, if there is a recession, it “will likely be a shallow one.”
“The Fed recognized weakness and provided liquidity to the economy,” according to Schulze. That, he added, rejuvenated those economic expansions.
“The good news,” Schulze said, “is that clearly the Fed has gotten the message and is cutting rates.” He added that these actions could lead to sometime intermediate: “a slowdown in the economy instead of an outright recession.”
Left unsaid by Schulze and those who agree with him: The easy money policies of the Fed led to a crash in 2008 and a recession. The cheap money policies also led to terrible times just after the turn of the century. The first decade of the century was so bad for stocks that it is now commonly referred to as “the Lost Decade.” Some see parallels to that in these times.
Indeed, another panelist at the recent Legg Mason meeting said a recession was coming and slightly disagreed with Schulze analysis.
“I think you are underestimating it (the recession potential). I think it is more than 50/50,” said Kim Catechis, head of investment strategy at Martin Currie. “I think you are likely underestimating the damage done on corporate profitability. It is underreported.”
He added that another factor pushing the nation into recession is the trade dispute between China and the United States. “This is a trade war that progressed beyond any evidence of progress.”
However, recently there did seem to be evidence of progress as the United States and China announced a preliminary agreement that settles some, not all, of the problems between the planet’s two biggest economies. These are problems that, if not settled, could hurt everyone.
Nevertheless, Catechis complained that the trade war “is being driven viscerally instead of strategically.” He added that there might be one or two negative quarters in 2020, but a recession is coming.
Another key player in which road the economy takes next year, Schulze contended, is the consumer. If he or she keeps spending, the recession might be avoided, he noted. However, what if the average consumer is spooked by bad times? What if many start losing their jobs? Then corporations start feeling in the bottom line.
That’s what other warn. They say the bigger issue is profits. The rate of increases in profits has been slowing. And some are predicting that profits will stall in 2020. Profits, or the lack thereof, are often the best predictor of a coming bear market and resulting recession.
Expansions and bull markets have been wonderful in the United States over the last decade under both the Obama and Trump administrations. But no one, not even banks or political leaders, can outlaw the business cycle. Bad times will come but when?
An All Weather Strategy
I don’t know.
However, in good times and bad, whether young or old, whether an aggressive or conservative investor, it is good to diversify. Always have some money in stocks, bonds and cash. Each investing category—including cash—has its time in the investment winners’ circles and will have its day again. As an investor, always be ready for all kinds of weather, especially the storms of bear markets, recessions or possibly even depressions.
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