Growth Slowing, but Precipitous Drop Unlikely
Although the current economic expansion is aging (bringing us nearer to a recession) leading indicators do not indicate a sharp contraction. What does that mean for equity investors? Director of Research Carmel Wellso explains.
- So far, leading indicators suggest the global economy is slowing but not at risk of a precipitous drop (barring a sharp deterioration in trade wars or other exogenous shock).
- In fact, although earnings expectations have eased, major stock indices are still expected to average at least single-digit growth rates in 2019.
- As such, we think investors should consider reducing risk exposure and pivot to companies that tend to deliver consistent earnings.
Carmel Wellso: If you think of it, in that, there’s a cycle and that we’re getting, we’re in the final innings of that cycle, we’re getting closer and closer to recession. And that’s the way I think of it. The first derivative is that growth is slowing, but I don’t think there’s any reason to think there’s going to be a precipitous drop and going negative in terms of growth at this stage unless there is a big movement in terms of the trade deal or something along those lines. There needs to be some exogenous factor that would cause a recession in the next few months. It would have to be something big.
I think are a number of predictors that you have to look at. And some of them are leading indicators. The Fed likelihood of a recession: That continues to rise but it’s still well below historic averages. Most of the leading indicators are still indicating slowing growth, not recession. But what I’m looking at are what’s the market doing? And we did see some debt deals pulled last week. We did see that the German issuance was actually curtailed. It was reduced from the original amount they were trying to issue. And when I start to see the bond market behaving that way, I start to think, you know, the market’s getting very nervous and there will continue to see a lot of movement into the lower-risk categories.
Right now, if you look at capex [capital expenditure], if you look at hiring plans, such as the ones for the small business, they’re actually above their 5-year averages. Those are July numbers; we’ll get the August numbers shortly and I suspect they’ll be down but still not precipitously. So I think we’re in a fairly healthy stage of the growth cycle, but it is slowing and we’re just getting closer and closer to the recession.
Earnings expectations have come down. They’re not, they probably still have a little bit more to come down because I don’t think the trade issues are fully priced in yet, but we are starting to see them come down. But we’re still looking at low double-digit growth for the NASDAQ [Composite]. We’re still looking at high single-digit growth for the S&P [500 Index], so we’re still in healthy growth, you know area, and a few percentage points lower of growth shouldn’t result in a big drop-off in sentiment.
At this stage in the cycle, we think that you should start to take a little bit of risk off the table. And I don’t mean that you should be taking down your exposure to growth stocks necessarily. It’s picking the stocks that have less cyclicality, finding the hidden pockets of cyclicality and finding ways to get exposure to the ones that have the consistent earnings because typically, the area that performs the best in a falling market are the companies that have consistent earnings.
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