Recession Hunters & Storm Chasers Beware

October 7, 2019

Recession hunters and storm chasers have lately been putting a cloud over the markets.  The chatter from the bears keeps getting louder and louder.  The recent see-saw pattern of the stock market continued last week. The first three days of trading saw the S&P 500 Index fall 4.7% as negative US manufacturing data suggested further contraction in this area of our economy. This was followed by Chinese factory sector contraction for a fifth month in a row. News in Europe was no different with German factories reporting their worst month since the depths of the financial crisis. Since early 2018 German industrial production is down almost 8% with motor vehicle production down almost 22%. As a comparison, US industrial production is off less than 1% from its recent high last fall.

Additional midweek economic news from the Institute for Supply Management reported their Non-Manufacturing Business Survey at 52.6 percent, which is 3.8 percentage points below the August reading of 56.4 percent.  Even though this represents continued growth in the non-manufacturing sector, pundits were quick to point out the slower rate.  Adding insult to injury our US trade deficit came in slightly lower than expected suggesting the strong US Dollar, and US-Chinese trade war, were taking their toll.  

This flurry of negative news gave recession hunters plenty of ammunition, but along came the Friday jobs report and things seemed a little more sanguine.  Labor Department figures show that employers added 136,000 jobs in September.  In addition, the unemployment rate came in at 3.5% – the lowest for 50 years. This news was a counter to concerns of slowing global growth, declining factory orders, and a jittery stock market.  By Friday’s close the stock market was looking healthy again having recouped most of the earlier week’s losses.  In fact, on Friday the S&P 500 Index closed at 2,951, up 17.8% YTD and just 2.4% off its the record close date.

Amidst all the conflicting data the American consumer still looks solid as measured by real retail sales and personal income.  Stock market optimists believe the Fed will lower rates further and provide further stimulus for growth and incentives for consumers to continue consuming.  Lower relative interest rates may also help reduce our resurgent dollar which is up almost 11% since early 2018.  An odd trend has been gold which is up 26.8% from a year ago.  Typically, the price of gold is inversely related to the price of dollars since gold is priced in dollars.  Perhaps, gold investors and the Fed are banking on lower rates, and a softening dollar to stimulate more economic growth. 

The outlook continues to be clouded by uncertainty. Maybe the American consumer will make this coming holiday season a success and buoy the US economy.  Maybe the bears will have their day. Whatever the future holds this is a time for a steady hand at the helm guided by a clear strategic map.

Gary B. Martin