Over the past three weeks we have seen a slight increase in volatility in the markets and that has caused some clients to wonder what is going on in the markets. We wanted to provide you with an update on the global economic slowdown currently in progress. As most of you may have seen in our most recent market commentary back on July 19, 2019, we provided a detailed opinion on where we believe we are at in the business cycle. Today’s commentary is intended to provide some follow-up on that commentary and hopefully shed some light on recent news, specifically, the inversion of the yield curve and talks of a recession.
Global stock markets have been whipsawing in both directions in an environment marked by slowing economic growth, Trump tariffs, and most notably, an inverting yield curve. What all this means is that the probability of a recession in the next 6 to 12 months is elevated. Economic anxiety is starting to set in and although we’ve seen the markets drop around 5% these past few days, we still do not believe this is the start of a recession, but rather an environment where the risk of tipping over into a recession is elevated. Needless to say, we are monitoring this data very closely. It is possible that in the next 3 to 6 months a much different picture of the economy has presented itself due to possible rate cuts and that we’ve weathered the storm. Or it could be that indicators continue to trend downward and more signals suggest that we are more likely to be entering into a recession. Our estimates currently have us at a 30% – 40% probability of a recession over the next 12 months. We will continue to update this probability of recession as time progresses. However, we do not believe the next recession will be anything like 2008 as banks are significantly healthier than they were back then.
It is important to note that the stock market may decline over the next two years if the business cycle peaks, and a bear market begins. To get a better understanding of where we are in the business cycle our analyst, Nathan Ramos, has provided a chart for us to look at to get his take on leading economic indicators. You can see in the chart below how US leading economic indicators (LEI) have stalled out in 2019 relative to the long-term trend going back to 2009. This chart shows the annual trend of the LEI and when the rate of change goes negative, it tends to suggest a higher probability of a recession taking place. Although this rate of change is still slightly positive, we are starting to see a decelerating rate of change on a year-over-year basis. Thus, it would suggest that it could go negative in the coming months. However, as we mentioned earlier, we are keeping a close eye on these indicators to see how they move – positive or negative – and we will keep you posted.
One method of weathering the storm is to maintain a well-diversified risk-appropriate portfolio. We also advise clients to ignore the news media and not look at one’s portfolio too often. Otherwise, short-term volatility (noise) may cloud your judgment regarding long-term investment goals. Keep in your mind that throughout history, no matter how bad things got, the economy and the stock market always recovered and eventually continued to expand exponentially. Remember that business cycles are a regular phenomenon within free-market capitalist economies and divesting from the stock market almost always was the wrong course of action. Recessions and stock market declines have always occurred and will continue to happen. What is important is to stay in the game. You cannot win the game if you are not even playing it.
With all this in mind, we stress the importance of having a well-diversified risk-appropriate portfolio. Otherwise, we are taking a defensive stance in rebalancing portfolios towards lower-risk assets. We will continue to monitor developments in the financial markets and economy and let you know as soon as anything changes in our views. Please do not hesitate to contact us at 210-223-8700 or via e-mail at firstname.lastname@example.org if you have any questions or concerns. We are here for you.
The information and opinions herein are for general information use only. Padilla Wealth Management does not guarantee their accuracy or completeness, nor does Padilla Wealth Management assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Past performance of an index does not guarantee future results. Indexes are unmanaged and cannot be invested in directly. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.