Displaying items by tag: recession
Is the Market Denying Political Reality?
(Washington)
Something very odd has been going on in markets for the last few weeks—investors are completely tuning out politics. The political situation both domestically and internationally has grown steadily worse in recent weeks. The US has a growing trade war with China, Brexit is a complete mess, Trump is meddling with allies etc., yet markets continue to move higher. Even emerging markets have rallied.
FINSUM: On top of politics, recession fears are also growing. Accordingly, it is slightly concerning markets are rising. Markets have learned to not take Trump’s comments too seriously, but that lack of sensitivity might be serving investors poorly right now. The Wall Street Journal says it best: “Markets are notoriously bad at pricing changes in the political weather until they are forced to”.
Despite Everything, the S&P 500 May Move Higher
(New York)
The market is currently facing a large number of headwinds: higher rates, a flattening yield curve, a growing trade war, and a high degree of international political tension. Yet, according to Barron’s, the path of least resistance for the S&P 500 may be higher. The reason why? Despite all the hovering the market has done this year, one big thing has fundamentally changed very recently—market breadth is increasing. In other words, the number of stocks which are advancing versus declining is improving. When the market does so, it is often a sign of better things to come.
FINSUM: We do take increasing breadth as a positive sign, as it reflects that investors across all sectors are feeling better and not just a handful hiding out in a few places.
The Best Recession Predictors Aren’t What You Think
(New York)
Right now everyone seems to be focusing on the possibility of an inverted yield curve occurring between the 2 and 10-year Treasury. However, that might not be the best recession predictor after all. If you are strictly focusing on yields, then the 1 and 10-year is better, as it gives less false positives. But speaking more broadly, the M1 money supply and housing starts are other great places to look as both tend to peak well before a recession; M1 is usually about a year, and housing starts two years.
FINSUM: The reality is that if you take a broader view, things don’t look too bad. M1 is still growing, as are housing starts, so those indicators look healthy.
Morgan Stanley Calls Big Bust Coming
(New York)
Are you worried about an inverted yield curve and the arrival of a recession? Morgan Stanley thinks you should be, as the bank has just called for a big bust coming to markets and the economy. MS thinks the Fed will end its contraction of its balance sheet soon, which will be supportive for long-dated Treasuries. Accordingly, with short-term rates still rising, the yield curve will invert soon; by mid-2019 says the bank. Morgan Stanley recommends investors to be overweight US Treasuries and underweight corporate credit.
FINSUM: The spread between two-years and ten-years is only 27 bp right now. We think it will much less than a year before an inversion, especially given the hawkishness of the Fed coupled with the threat of a trade war.
Currencies to Buy for a Recession
(New York)
Whether investors like it or not, a lot of signs are currently pointing to a pending recession. The yield curve has flattened dramatically, and the trade war and hawkish Fed loom large. With that in mind, JP Morgan has put out a piece telling investors which currencies to own when a recession hits. According to Paul Meggyesi of JP Morgan, it will be best to own the US Dollar, Swiss France, Japanese Yen, and Singapore Dollar, and to get rid of any emerging market currencies. The Yen and Dollar look best, as in a deleveraging scenario, the whole world needs to buy back Dollars as it is the default funding currency.
FINSUM: No surprises here, but given how long it has been since a recession, it is always useful to revisit the logics and strategies to use during one.