Displaying items by tag: recession

(New York)

It has been a long time since value stocks had a chance to shine. A LONG time. Growth stocks have handily outperformed their growth cousins, so much so that even some diehard value investors have talked about giving up on the practice. Value stocks took a pounding in March following the Fed’s dovish turn and spreads versus the market’s most expensive stocks are at their widest in 70 years. This means it may be a good time to buy, says Bernstein’s equity research team. If you look away from financial value stocks, the sector did not actually get wounded much last month. The reason why it may be time to buy is two-part: the first is that value stocks tend to outperform when the economy is slowing, but not in outright recession. The second is that high value stock spreads are seen all across the economy, and not just in challenged sectors, which means they are less likely indicative of real challenges and are more likely just a market symptom.

FINSUM: We understand this analysis, but have to disagree. We just don’t think the old precedents for value stocks hold much water at the point. Our view is that as growth slows, investors will buy the stocks with the most growth, not the cheapest ones.

(New York)

Headline fourth quarter growth got downgraded this week to just 2.2% (from 2.6%). That may not seem like a devastating fall, but if you take a closer look at the figures, they are worse than at first glance. In particular, it becomes clear that growth was actually weakening all throughout 2018 (versus 2017). While the fourth quarter especially showed weakness, it was really only two one-time quirks that kept growth as high as it was for the year: increased military spending and higher spending by non-profits. Neither of those factors are very tied to the underlying economy and consumers.

FINSUM: This is pretty eye-opening and does sap our confidence a bit. Consumer spending also barely rose in January, which is another negative sign.

(New York)

Another day, another round of bad news on the economy. In what comes as another round of disappointing data, GDP for the fourth quarter was just revised downward from 2.6% to 2.2%, showing the economy finished the year on a softer note than expected. The data adds to the list of poor numbers—labor, housing etc—that have been hitting investors.

FINSUM: Weak economic and housing data have been flowing like a hose lately, and today is no different. This will only add to the downward momentum in yields.

(Washington)

Yield curves are widely known to be the best indicator of forthcoming recessions, hence why the market is spooked. However, a lesser known fact is that they are also good indicators of presidential elections. Looking historically, whenever the yield curve is inverted at the time on an election, the incumbent loses. This occurred in 1980 in Reagan’s victory, as well as in the 2008 election of Obama. Both times, the yield curves were inverted and the economy in recession. That said, flat yield curves don’t seem to have much effect at all and hold little advantage for either party.

FINSUM: Given that recessions usually take 12 to 18 months to start once the curve inverts, it is entirely possible that one could begin just before the 2020 election.

(New York)

For the last year all the fear in bond markets was about inflation and how the Fed would handle it. Were we going to be hiked into a recession? Now all of that has shifted and fixed income gurus are concerned over an entirely different beast—recession. In many ways the fears of recession have become so strong that they are intimidating the market as a whole, making the term “bond vigilante” more than appropriate here.

FINSUM: The speed with which the bond market has reversed since December is pretty alarming. We do wonder if this inversion might be a false signal.