“But…the global slowdown is temporary.”
The expectation of an economic recovery to support the continuation of the bull market is likely misplaced for several reasons.
- The Fed rate hikes that were done in 2018 are still working their way through the economy, Higher rates are impacting economically sensitive sectors like autos, housing, and manufacturing.
- Economic growth globally remains weak and is impacting growth in the U.S.
- Interest rates, and the yield curve, despite stocks hitting “all-time” highs are suggesting that economic weakness is likely more pervasive than currently believed.
- The rising trend of the U.S. dollar will impact exports which makes up between 40-50% corporate profits.
- Imports continue to suggest the U.S. consumer, 70% of the economy, is weaker than headlines suggest.
- Rising oil prices, and gasoline prices, are a tax on consumers and will further impair economic growth.
- Deflation is a rising concern.
- There is no massive slate of natural disasters to pull forward consumption or boost manufacturing, construction or commodity demand.
- While deficit spending is certainly supportive of growth, with the deficit already at $1.2 trillion, the rate of change in deficit spending will not be supportive of stronger economic growth.
The RIA economic composite index (a broad composite of hard, soft, and leading indicators and surveys) has turned lower. Historically, turns from high levels (dashed black line) tend to revert to the lower bound suggesting more economic weakness is likely in the quarters ahead.
That reversion would also align with the recent CFO survey which generated responses from more than 1,500 chief financial officers, including 469 from North America, and showed:
- 67% of those surveyed predicted the U.S. economy would be in recession by the third quarter of 2020,
- 84% believe a recession will have begun by the first quarter of 2021.
- 38% of respondents predicted a recession by the first quarter of next year.
While CFOs are not as pessimistic as they were three months ago, it is unusual in the history of the survey for such a large share of respondents to predict a recession just 16 months from now.
The Problem Of Eternal Bullishness
With the current economic cycle already long by historical standards, economic data continuing to remain weak, and profit margins on the decline, there is an increasing possibility that “risk” may well outweigh “reward” at this juncture.
Such doesn’t mean that stocks can’t go higher in the near term, and despite some wiggles along the way, it is quite likely they will simply because of momentum and lot’s of “bullish bias.”
However, the problem of “eternal bullishness” is that it leads to the “willful blindness” of risks, rather than having a healthy respect for, and recognition of, those risks. This leads to the unfortunate problem of being “all-in” on every hand which has a devastating consequence when a mean reverting event occurs.
John Hussman once penned an excellent piece on the full-market cycle:
“Regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full market cycle. While the most extreme overvalued, overbought, overbullish, rising-yield syndrome we define has generally appeared only at the most wicked market peaks in history, and investors have ignored those conditions over the past year. We can’t be certain when the deferred consequences will emerge. But a century of market history provides strong reason to believe that any intervening gains will be wiped out in spades.
It’s instructive that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to May 1996, while the 2007-2009 decline wiped out the entire excess return of the S&P 500 all the way back to June 1995. Overconfidence and overvaluation always extract a terrible payback.”
In the end, it does not matter IF you are “bullish” or “bearish.” The reality is that both “bulls” and “bears” are owned by the “broken clock” syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong”during the second half.
Lance Roberts is a chief portfolio strategist and economist for Clarity Financial. He is also the host of "Street Talk with Lance Roberts," chief editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and LinkedIn.
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