Recession Overhype?

There are a lot of articles on signals of a coming recession, pointing to slowdowns in a number of different areas including manufacturing, automotive, semiconductors, oil, base metals, trucking/freight, and so on. Throw in the slowdowns in Europe and emerging markets as well. The biggest signal they all point to is the inverted yield curve, where 2 year treasuries yield more than 10 year notes.

Meanwhile, US stocks are still near all-time highs and have been chopping through a range, often jumping a percentage point up or down based on the latest sentiment regarding trade talks.

US stocks still show a number of bullish trends including leadership of consumer discretionary stocks, along with significant breadth in the number of stocks hitting new highs. If I had to bet on it today, I’d say the S&P is more likely to re-test it’s highs than correct lower at this point. In other words, I’m still bullish on US equities and I don’t think the US will see a technical recession.

As it goes, I’m trying to stay somewhat neutral buy having the same number of bullish bets (using calls) as bearish bets (using puts). The idea is to make money when the market moves either way, so I can be just as excited about a 1.5% drop as a 1.5% rise, just hoping that they don’t stay flat.

Back to the no-recession call though … my main reasoning behind that is that the US economy today is dominated by sectors that are non-cyclical. The biggest sectors of our economy such as finance, insurance, medical, technical/scientific/professional services, information services and so on are still growing at a decent clip. Manufacturing and base metals mining are down, but these sectors are much smaller parts of the US economy today. Oil is relatively cheap but it isn’t causing our producers to shut down or anything. In other words, the largest parts of our economy seem to be growing more than enough to offset the sectors which are slowing.

As for the inverted yield curve – when central bank intervention is crazy enough to have trillions of dollars in negative-yielding bonds, it makes it hard to rely on technical signals in these markets.

Does that mean stocks will shrug off recession fears and go wildly bullish? I’m not sure. Changing opinions on the underlying economy can easily lead to fear that the Fed won’t jump in with more rate cuts, which could certainly spark a correction downward. So the stock market could go either way – I just don’t expect markets to be flat.

One last thing I thought was interesting… There are a number of momentum strategy based ETFs. The largest is MTUM, which started in 2013 and has $10.6 billion in assets. Since inception, it has typically beaten the S&P handily without overshooting to the downside on market corrections. I really think momentum investing and chart analysis are going to get more popular than ever in future years, which will ironically make them work even better. The idea is you hold stocks hitting highs and dump them when they turn so that others look more bullish. If a lot of money does this, we should expect stocks to push their up-trends even higer and their down-trends even lower, increasing volatility and driving fundamental analysts bonkers.

Ill end on that note. Have a pleasant evening.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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1 Response to Recession Overhype?

  1. heliumspark says:

    Interesting analysis, John. I’m curious how it will all turn out.

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