Displaying items by tag: economy

(New York)

The market is so turned on its head right now that yesterday’s 126 point drop in the Dow seems like good news. The market has been so bad lately, that the fact that yesterday’s potential 550 point loss shrunk to only 126 points seemed like a positive development. Investors are worried about the idea of peak earnings, but analysts insist they are overreacting, with many reiterating that earnings will continue to be strong and the economy will stay in expansionary mode. Kate Warne, a strategist at Edward Jones, says that investors will realize this is not the end of the economic cycle just yet. “It’s not peak earnings, it’s peak earnings growth”, says Warne, continuing “The pace is still positive, just the growth rate isn’t as high as it was”.

FINSUM: We tend to agree with the strategists. If earnings still continue to grow in the next couple of quarters and the economy stays strong, it is hard to imagine that stocks will keep falling.

(New York)

The big question on every investor’s mind (and Wall Street’s) is when the US recession will arrive. With the economy doing so well, and certain indicators flashing negative, a recession in the next few years looks all but certain. But how soon? Some say it will be by the end of 2019, others think that is too aggressive. Well, a survey of US business economists has just been published that shows a majority of them believe the recession will arrive before the end of 2020. Most precisely, 66% believe a recession will occur before the end of that year.

FINSUM: This seems like a fair representation to us, but predicting the timing of recessions is notoriously difficult, so there may be little value in this survey.

(Washington)

The Fed has hiked rates many times over the last couple of years, but the overall attitude of Fed officials has been very relaxed. They have been diligent to project a very mild outlook of rate hikes. However, that may be set to change, argues the Financial Times. The US economy is growing very strongly, and the odds that the Fed may have to adopt a much more hawkish position are growing. The Fed’s hikes, though frequent, have been small, meaning policy is still accommodative and pro-growth. However, given the state of the expansion, a sharp move higher in rates is looking increasingly necessary.

FINSUM: Given the Fed’s most recent statement, this argument carries some weight. We can see Powell and the team getting more hawkish. That said, the economic tailwind of tax changes is fading, so perhaps it won’t be necessary.

(New York)

Several Wall Street analysts are warning that the US will fall into a recession in 2019. Some are even pegging the odds as high as 100%. The reason for the recession will be the increasingly aggressive Federal Reserve, which yesterday adopted a more hawkish stance on the economy and rates (with a more aggressive dot plot and the removal of “accommodative” from its policy statement). The current trade war is the other big factor which could push both the US and global economy into recession, as international trade is already contracting.

FINSUM: Forecasting the timing of the next recession seems futile to us. However, we will admit that the Fed adopting a more hawkish stance (and the fact that the funds rates is now higher than inflation) worries us.

(New York)

The whole market is generally afraid of rising rates. Both in 2015 and 2018, there were significant mini-meltdowns about the prospect of aggressive rate rises. One of the aspects that most worries investors is that higher rates will drive participants out of stocks and into higher-yielding bonds. However, while true in some respects, that narrative is far too simple. Higher rates are a symptom of a healthy and growing economy, which means the business fundamentals driving stocks are getting better, a factor which is likely far more important than incremental changes in rates.

FINSUM: We think there is some wisdom in these words, especially as they perfectly encapsulate what has happened with the market this year.