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By Rich Weiss - October 2019
There’s a saying on Wall Street that bull markets don’t die simply of old age. I would add that they don’t live forever, and you will see signs when they are coming to the end of their life spans.
Four signs have caught my attention. First and foremost, global growth is slowing down. Second, earnings growth is grinding to a halt. The third sign was the antibiotic shot the Federal Reserve gave the market in the form of interest rate cuts. And the bond market delivered the fourth sign when the yield curve inverted—that is, the interest rate you get on longer-term bonds became lower than the interest rates you get on short-term bonds.
While I’m not raising the recession flag just yet, I do believe caution is warranted. After all, even an aging bull can gore you.
Watch my latest video for more insight on the signs and how we’re positioning our portfolios.
Despite what is a lackluster overall macroeconomic environment, the stock market in the U.S. continues to churn higher. So, it appears to be anomalous, but there are reasons for that.
If you look at the overall global macroeconomic environment, a few of the statistics give us pause at the current time. First and foremost, global economic growth in real terms—that’s real gross domestic product (GDP)—for most of the major economies is decelerating, slowing down. Earnings growth is grinding to a halt here in the U.S. Last quarter—corporate earnings barely positive in terms of growth and very few positive surprises.
The Federal Reserve has recently turned more accommodative with its monetary policy. Meaning: it’s beginning to lower rates after it just began raising rates last year. And so, that’s a turn in policy, and that’s concerning because generally the Federal Reserve only does that when the economy is weak or expects to be even weaker and needs the assistance of lower interest rates to put money back into the system. It’s the equivalent of someone going to the doctor and the doctor putting them on antibiotics.
The yield curve is inverted—that is, the interest rate you get on longer-term bonds is actually lower than the interest rates you get on short-term bonds, which is a very unusual situation and many times precedes a recession. So, there are many different indications that the economy is slowing down and that the markets shouldn’t be doing as well as they are.
There’s no reason to believe at this time that the next recession—when it occurs—will be as deep or as long-lasting as what we saw back in 2008. The situation back in 2008, where you had massive household and corporate debt and other economic issues going on, is unlikely to be repeated this time around. Recessions typically come every three, four, five years. That’s the length of a “typical” economic cycle.
We’re neutrally positioned, and any of the gains we’re putting back into other asset classes. We’re neither bullish—that is, we’re not putting new monies to work in the stock market—but at the same time, we’re not bearish. We’re not selling equities. We’re neutral. You know, even an aging bull can gore you.
Get additional insights in our latest Investment Outlook.
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