Jan. 4, 2019 Commentary

Monthly Economic Notes


December was quite a month. The economy continues to roll along. Christmas sales appear to have been strong. Consumers opened their wallets and spent somewhat freely. At the same time, however, the stock market declined during the month like we haven’t seen in quite a while. Many broad-based indexes have now declined by approximately 20 percent from their recent all-time highs. Typically, a significant decline in stock prices can signal an oncoming economic recession. We have been of the opinion that the next recession is at least 12 months off.

Is the stock market telling us we are wrong? Are we missing something? Is the economy coming into an outright contraction as we enter 2019? Is the economy moving quickly to a recession?

2019 Economic Outlook

To rehash, we have long been suggesting that the current business cycle is mature. The last recession ended more than nine years ago. The current business cycle is now the second longest in our nation’s post-war history. By our reckoning, we will pass the 10-year anniversary of this cycle in this coming year, making the current cycle the longest in our recent history.

But, we have also been calling for GDP growth to slow markedly in 2019 as compared to the strong growth we experienced in 2018. It appears the U.S. economy grew by about 3 percent in 2018. We are looking for growth of 2 percent in 2019. This would represent economic growth returning to the cyclical trend. Our expectation of the rate of growth contraction has been more marked than the average economist’s view. Now, many others’ views are moving closer to our own. Following are the factors that have led us to the view that economic growth will slow in 2019:

  • Employment is full. There are now more jobs available in the economy than official unemployed workers. This generally leads to higher wages, which is good for consumers but typically bad for businesses. Much of the consumption improvement we have seen over the last few years has been primarily driven by more people getting jobs. Additionally, the housing market seems to be weakening. As rates have risen, housing sales are starting to show signs of peaking. The consumption-driven stage of the economic cycle seems fairly mature. 
  • Business confidence is starting to roll over. With wage pressures building, and with the uncertainty foreign trade policies have brought forward, business leaders seem to have become more cautious about the future than they were earlier in 2019. CEO confidence readings peaked earlier in 2018 and have been in a slow decline over the last six months. Historically, there is a high correlation between CEO confidence and business investment levels. 
  • A number of foreign economies are showing definite signs of weakening economic growth. China, Japan, Germany and much of the rest of Europe are all showing signs of slowing economic activity. This weakening growth radiates to the U.S. economy through not only slowing trade activities, but also by lowering overall business sentiment measures.

The indicators are becoming clear, pointing toward a slowdown in economic growth. So why is this happening? From a causal standpoint, the slowdown in growth, in our opinion, is being intensified by Washington’s policy changes and policy errors. We have long written of our concerns regarding the administration’s trade policies, and we have warned investors of the risks Federal Reserve policies were creating in the capital markets. These worries are now front-and-center in the financial system, as many stock indexes have declined by approximately 20 percent from their recent highs. 

Coming back to our original question: is the stock market telling us we are entering into a recession? Some believe the stock market is “talking” to us, saying that a recession is just around the corner; however, we disagree with this market translation. We suggest the market is telling us that yes, indeed things are worrisome, and the business cycle is long in the tooth. But we believe the market is telling us something else, that the uncertainties fostered by Washington’s trade policies and the Federal Reserve’s monetary tightening actions are creating more uncertainties with which the market recognizes and is attempting to deal.

An Interpretation of Stock Market Activity 

Slowing growth in economic activity does not typically, in itself, fuel a 20 percent decline in stock prices. Assuming we are correct in our view that a recession will not occur in 2019, why are stocks declining in value? In our opinion, this bear market is policy-driven rather than economically driven. Monetary and trade policies radiating from Washington are primarily driving stocks lower, and not GDP growth, rising inflation trends or a collapse in corporate profits. 

For investors, this is an important distinction.

From a historical perspective, over the last 45 years there have been eight bear markets, three of which haven’t been accompanied by an economic recession (1978, 1987 and 1998). The average change in the market during these three previous bear markets was -23.9 percent. The five other bear markets have been accompanied by an economic recession (1973, 1982, 1990, 2000 and 2007). On average, the market declined by a rather stunning 36.2 percent in value during those recession-driven market contractions. (All data is provided to us by our friends at Ned Davis Research.)

With this background, it becomes apparent why we monitor economic events and attempt to provide evidence of building economic recessionary risks. If our analysis is correct, it also becomes apparent that the current downturn in the stock market is close to mirroring the normal non-recession bear markets experienced over the last 45 years.

The U.S. stock market has declined during the last few months. With the above background in mind, we suggest we are experiencing a non-recession, policy-driven bear market. In our opinion, investors can lay this current bear market at the feet of trade and monetary policy decisions, some of which, we believe, are becoming destructive.

In the End, We Believe Economic Growth Should Slow in 2019

On balance, our overall economic outlook for 2019 remains constructive. While our outlook remains positive, we believe economic growth should slow during 2019. Evidence currently points to a significant growth slowdown starting sometime in the second half of 2019. That being said, we suspect current worries about an outright economic contraction being right around the corner will prove premature.

So, what will calm fears of an upcoming economic recession? A constructive settlement with China on the trade front, along with the Federal Reserve backing away from its tightening processes, would likely ease market and economic tensions. Will either of these happen? We obviously don’t know. We suspect the Fed will slow its interest rate increases, raising rates only once in 2019. The real question on our minds has to do with the Fed’s process of tapering its balance sheet liquidation. 

Don’t get us wrong. Even if these two distractors are calmed, risks of an economic contraction will likely continue to build throughout 2019. 

This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisor’s investment advisory services and general economic market conditions. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations, and is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. There is no guarantee that any claims made will come to pass. The opinions and forecasts are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. 

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