Much of the talk in financial media over the past year has market experts and economists predicting whether or not the U.S., and the world, is headed toward a recession. Recession chatter has especially picked up over the past two months as some leading recession indicators are beginning to flash warning signals. U.S. Treasury yields have been declining throughout the summer and the 10-year UST vs 2-year UST yield curve has inverted causing panic within equity markets. Markit PMI headline manufacturing, a leading economic indicator, has fallen below the key reading of 50 which is the line between expansion and contraction. Several other recession warning signals have been trending in the wrong direction yet the leading economic index (LEI) indicator improved month over month according to Schwab’s Chief Investment Strategist Liz Ann Sonders.
The most obvious culprit for the decline in economic data at this moment in time is the ongoing trade war between the U.S. and China. Uncertainty surrounding global trade policy has sparked a slowdown in production and manufacturing around the world. As uncertainty has risen, businesses have been hesitant to invest in any capital projects until there is more clarity.
Despite the global uncertainty surrounding trade, the U.S. consumer has remained resilient. Most economic data points concerning the consumer have not declined to warning levels yet and consumer confidence is still strong. So why is there so much fear of recession currently? Below is a chart of the S&P 500’s performance since January 1, 2018 along with Google search trends for the words “recession” and “stock market.
S&P 500 in Red; Stock Market in Orange; Recession in Blue)
An important takeaway from this graph above can be found in JP Morgan’s ‘Notes for the Week Ahead’ from Dr. David Kelly who has said the following about current recession fears:
“That being said, as we show in our Weekly Market Recap, recessions are mostly caused by a collapse in confidence leading to a slump in business hiring. Consequently, increased recession talk, whether due to the inversion of the yield curve or rising tariffs, do make the economy more vulnerable to recession today than at any point thus far in this longest of U.S. economic expansions.”
As you can see from the graph above, there has been little interest in recession until this month. Remember, a recession occurs due to market psychology more than any other reason. Something we have discussed recently, and Dr. Kelly has noted, is that often a recession can occur by an economy simply talking itself into recession. We discussed this in our note about the yield curve inversion recently here.
Sharp market sell-offs correspond with an uptick in the search term “stock market” with news headlines that often are negative. We have written about this before on our blog and MarketWatch wrote about it as well yesterday. What we have included this time is also searching for the term “recession.” It is important to note that this month’s downturn in the S&P 500 corresponds directly with a spike in searches for recession. As we stated in our previous article on this topic, people are exposed to headline news when there is doom and gloom and less interested when there is growth in the markets. In fact, many stock market news outlets have admitted their ratings are higher when the market is going down. Getting caught up in the bad news may cause an investor to stray from their current financial plan or “panic sell” investments to feel safe.
These sell-offs within equity markets are why we hold investments offering some downside protection to help tune out the noise and mitigate the downturns in equity markets. If you have any questions about your portfolio or if you would like to learn more about how Blue Bell Private Wealth Management can help your investments, please call our office at (610) 828-3540 or email us at firstname.lastname@example.org.