Over the summer, fears of a recession began to tick higher. It was never the Wall Street consensus (when is a recession call ever Wall St consensus?), but it certainly was a concern for many.
Recent data has taken the analyst community back towards a growth consensus and away from fears of a significant slowing. The perhaps premature conclusion is we have avoided a recession. These two recent Bloomberg articles are typical of the consensus:
Various data points we see get cited by the economic bulls: CapEx spending, Stock Market gains, Corporate Earnings, GDP, Retail spending. These data points are worth watching closely, as they do have the capability to help skirt a cyclical slow down.
However, they are being offset by employment weakness, falling wages, inventory builds, excess debt, slowing profit growth, de-leveraging, Consumer Confidence, housing overhang, to say nothing of European woes and budding issues in China.
What most people find especially surprising is my tendency to have a bullish exposure while increasingly raising expectations of a recession. There are a few reasons for this:
1. Frequently, markets and the economy go separate ways;
2. Most recessions have begun in a quarter with positive GDP.
3. S&P 500 companies are deriving profits globally, and recession may be local.
4. Different time periods: Market moves are short term (3-6 months), while economic shifts are intermediate (6-24 months).
Just as no stock market moves in a straight line, so too no economy expands or contracts in a simple linear fashion. We find ourselves in a phase where oscillations within the broader market cycles will increasingly cause people to feel comfort that we have avoided a recession.
From January to today, I have raised my estimates for a recession over the next 18 months from 15% to over 50%.
Based on the data I have reviewed, I see nothing that makes me firmly believe we will miss a recession. However, if we continue to see improvements, and especially if Employment gains traction, I will gladly lower that forecast to under 50%.
Regardless, my short term market expectations remain bullish, and I expect to see further gains before I reduce my equity exposure.