The balance of positive economic news during the week appeared to blend well with the on-going trade war uncertainties between the U.S. and China. Such a noted blend, however, did not come without the expense of strong volatility, both to the downside and to the upside. Global equity indices posted one of the worst drops of the year on Wednesday and caused investors to once again anticipate recessionary pressures on the horizon. Based on the recent yield curve inversion, which indicates short-term interest rates are higher than long-term interest rates, history would suggest that a recession is imminent sometime in the next 24 months. Although such a statement may cause angst and the desire to exit equity market participation, we’re urging investors to remain objective in their data assessments. Not only has it historically taken up to 2 years for a recession to potentially materialize post an initial yield curve inversion, but the Standard & Poor’s (S&P) 500 index has gained an average of +11% in that time frame (as observed by aggregating data in the past 6 recessions). Moreover, caution is greatly advised in the belief that a recession is imminent simply because of historical standards. The economic factors attributed to recessions remain drastically different today than they did in the previous recessions of the past 20 years. Factors like sector specific equity bubbles, weak labor market, weak consumer and small business sentiment, weak consumer debt service capabilities, declining corporate earnings, low consumer wages, and overall declining leading economic indicators, are NOT things that are flashing warning signs. Even for those few indicators that may be weaker (not weakening), their historical correlations with other factors are failing to materialize. This indicates a breakdown in the observance of multiple economic indicators flashing warning signs. Our internal assessment of a potential slowdown, which may bleed over to unwarranted equity market volatility in the short-term, relies heaving on gauging consumer health. Such health currently stands at tremendously positive levels. We believe that the next economic cycle shift may likely be more subdued given that the main economic engine (consumer) is showing no eminent signs of objective weakness that is capable of strong equity market downside. As always, the risk centric nature of our multi-strategy platform has taken advantage of recent volatility given our proactive allocation guidelines to risk-sensitive assets. We stand ready to further take steps in that process as needed.
It’s important to stress the positive economic data points released domestically during the week. Such data further supports the notion of a healthy consumer and our on-going assessment of attempting to pinpoint numerous factors capable of signaling systemic weakness. Firstly, the Consumer Price Index gained an annualized 2.2%, which surpassed economists’ estimates and was a welcoming sign for investors. Modestly higher inflation in the short-term is a positive given that it spurs consumption and allows the Fed to more accurately administer monetary policy guidelines in an expanding economy. Secondly, we learned that July retail sales surged by 1%, outpacing economists’ estimates by a whopping 0.60%. Such a margin is massive in this data set and sheds further optimism on consumers. The immensely strong release of quarterly earnings by Walmart was also a welcoming surprise as it relates to consumer health. The company’s forward earnings guidance was revised higher given their assessment of a fiscally strong consumer through year-end. Walmart’s strong quarterly earnings also provides insight on the fact that it does not appear U.S. consumers have felt the price pinch from the ongoing trade war. We’ll be keeping a close eye on such developments that may discourage spending.
Investment Policy Committee:
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
*All data referenced in this article was sourced from Bloomberg.