Unemployment is at a 50 year low and the stock market is at an all time high. The NASDAQ just crossed 9,000 for the first time today. So how can anyone think about recession?
The truth is recessions start to crop up when there are plenty of signs to the contrary. From the perspective I mentioned, things look good in the United States.
That, however, is only through one prism. There are other issues that we must look at.
For example, it is hard to ignore the track record of the inverted yield curve. As an indicator of a recession, it has a rather successful track record. Usually, within 12-18 months of appearing, a recession takes hold. This would put it in 2020.
We also have an earnings recession that might be entering its 4th quarter in a row. Earnings are down across the board with the exception of a few companies. This is being masked because of stock buybacks. One thing that cannot be masked is the fact that the top line, for most companies, is on a downward trend, something that started as far back as 2016.
The President and Congress pushed through tax cuts to corporations on the promise this would lead to higher growth. That did not happen. Instead, we are watching growth slowing in the United States, one of the few promising economies around the world.
With an election next year, we are going to see a campaign to reverse a lot of what Trump did. Tax cuts, regulation, and the tariff situation would most likely be reversed if one of the Democrats gets elected. While that person would not be in office in 2020, the campaign might through uncertainty into the laps of investors.
What will be the tipping point is always unknown. Investors operate better when there is a large degree of certainty surrounding the macro situation. This is not present. Much of the "smart" money is still on the sidelines. The European bank situation, which I wrote about on a few occasions, still is sitting out there.
If the American economy were to slow, for whatever reason, this likely would send unemployment up. The fallout throughout the economy would end up being a self perpetuating machine. As unemployment rises, the payout of benefits hits. This is coupled with a loss in tax revenue. Consumers start to slow their spending as defaults on existing debt rises. With an economy that is 70% made up by the consumer, this is fatal.
The impact of quantitative easing around the world is slowing. This is the challenge with trying to keep things "propped" up. That said, after such a strong bull run, a bit of clearing out is inevitable.
2020 could be the year where things turn south. President Trump is, obviously, going to do all he can to keep things going until after the November election. Can he do it?
Time will tell. There are some green sprouts to point to, the biggest being the stock market. The companies that are doing well are showing strong growth. This is something that can be paraded out there by a politician.
Will it be enough?
Check back in November.
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