(Forbes) The only ones seeing a recession now are uber bears, who live for major market corrections, and the financial pundits advertising for it on CNBC and Bloomberg.
Bloomberg op-ed pages were once again prognosticating about a recession on Tuesday, basically saying every investment firm except for Jeffrey Gundlach’s DoubleLine (who hates bonds) is wrong and 2020 is largely in the clear.
Bloomberg’s John Authers makes this point today: “If we look carefully we can see that the last time pessimism reached such a crescendo and then collapsed, in early 2008, it was followed by the worst recession that most of us can remember.”
Is there a mortgage-backed securities bubble being blown? Is there a rebirth of the subprime lending market? Are people making $50,000 a year buying $350,000 homes in Florida with no money down?
The reason Google searches for recession have moved up over the past year is because all Bloomberg, CNBC and Zero Hedge talk about is the coming market crash.
Do negative interest rates cause a recession? Is that why Germany’s economy is contracting? What about the trade war? Can that send the U.S. economy into negative territory. Maybe. But for the U.S. it won’t next year based on what looks now to be an overwhelming consensus view.
S&P Global Ratings, Barclays, Schroders, State Street and—as of Tuesday—the country’s largest asset manager, BlackRock have either said recently that the risk of recession is falling or are predicting no recession in 2020.
Does that mean one is not coming? No, it doesn’t mean that. S&P Global Ratings chief economist Paul Gruenwald gives it a 25% to 30% probability, down from a 35% probability in his last forecast.
Investors have to be vigilant and prudent as ever, even if the risk of recession — as Gruenwald believes—is declining.
Considering that the last time everyone was bullish and the market crashed it was because of the mortgage-backed-securities trade going bust, and seeing how there is no such thing like that in the market today, chances are high major investment firms are right: there will be no recession and no bear market in equities in 2020.
For BlackRock, the U.S. will contribute to a slight uptick in global growth in the first half of the year, though overall growth will end lower than it did in 2019.
“This economic cycle—now entering a second decade—has been unusually long and shallow. The late-cycle, dovish pivot (by the Fed) has also been unusual, and there are few signs of the traditional late-cycle limits of economic overheating. As a result, we don’t see a slide into recession as the primary risk—but a stubborn mix of slower growth and rising inflation,” says Sarah Foley, a BlackRock senior economist.
“2020 is not a year of recession,” says Rick Lacaille, global chief investment officer at State Street Global Advisors. “We expect the global economic recovery to continue into 2020 against a backdrop of continued monetary easing, policy shifts and persistent pockets of resilience. There are clear risk factors but overall, we expect world real GDP growth (to increase),” he says.
Last week, S&P Global Ratings forecast U.S. GDP to come in at 1.8% to 1.9%, close to its 2% growth potential. That’s down from 2019’s forecast growth rate of around 2.3% and 2018’s GDP growth of 2.8%.
The primary risk for most money managers heading into 2020 is a total breakdown in U.S.-China trade talks. This could undermine business confidence and market sentiment, but Tuesday saw House Speaker Nancy Pelosi finally agreeing to the new Nafta legislation, now known as the U.S. Mexico Canada Agreement. USMCA could easily increase business and investor sentiment now that that trade deal is done. Canada and Mexico are also expected to ratify it shortly.
Central banks remain a question mark for 2020, giving the bears something to worry about. This is especially true in Europe where negative interest rate policies are being re-examined.
Understanding the credit cycle and its interdependency with central bank action is key for market timers. Credit has been a leading indicator for the last two recessions, where high yield spreads started to widen away from Treasury yields while equity indices kept on making new highs. That means investors think high-risk credit is looking dangerous, yet somehow believe that doesn’t translate into equities and are buying stocks. It is an indicator that something in the market is out of whack.
Moreover, a flattened yield curve and the threat of an inverted yield curve gave investors a reason to believe a recession was near for a large part of the year.
That might be why some pundits are still touting a recession. They have been pondering the pending crash all year, especially on the op-ed pages of Bloomberg, which has become part of the Trump resistance.
Markets have gotten used to Trump-inspired disturbances. The knee-jerk reactions from resistance members in the press hoping for a recession to hurt his chances of re-election aren’t convincing investors it’s time to go short.
“Once again, the sustained increase in volatility failed to materialize in 2019 despite heightened geopolitical risk,” says Olivier Marciot, senior vice president and investment manager for Unigestion, a $23 billion global asset manager, from the U.K. “These well-flagged events do not seem to scare the market anymore. Investors are slowly growing more accustomed to the constant presence of these risks and react to them in a less emotional way.”
That the U.S. economy will slow heading into 2020 is now consensus. That it will contract on the year is something only the financial pundits are warning about.
Analysts from the BlackRock Investment Institute wrote in their Global Outlook 2020 report today that U.S. consumer spending should slow a tad, but savings will pick up. Increased savings blows another hole in the comparison with 2008, when Americans were levered up on debt.
Wage gains and a strong labor market should keep consumer sentiment near all-time highs, investment analysts at State Street and BlackRock said in their recent year-end outlooks. If the consumer drives the U.S. economy, then the U.S. economy is in fine shape.
For investors, BlackRock thinks the expected growth pickup is good for a moderately pro-risk stance heading into the new year.
