Wealth Planning

Is the recession obsession justified?

We don’t think so. Here’s why we’re recommending investors maintain a balanced and strategic approach.

Something strange happened toward the end of the summer—the word “recession” re-entered the mainstream. If you just read the headlines, you might have thought we were in a recession already. According to Google, the word “recession” has only been searched more during the global financial crisis. This re-emergence is not without an explanation: Markets and economic data are showing some troubling signs.

The most acute cause for concern is that the spread between 10-year Treasury yields and 2-year Treasury yields temporarily inverted in August. Historically, an inversion of the yield curve has been a reliable indicator that a recession was coming soon. It’s not just bond markets. The Federal Reserve retreated from its rate hiking campaign by lowering interest rates at the end of July. Globally, manufacturing and trade data is suggesting very weak levels of activity, and the tit-for-tat escalation of the trade dispute between the United States and China is damaging sentiment and adding to uncertainty.

Enthusiasm after China stimulus and Trump’s election was short-lived

Line chart compares Cyclicals vs. Defensives and the 10-year U.S. Treasury yield from August 2014 through August 2019. From October 2016 through August 2018, both lines trend upward (a period of cyclical leadership and high yields), but then decline back to levels they were at between February 2015 to September 2016.

Cyclical vs. defensive equities (indexed Aug. '14 = 100) and 10-year U.S. Treasury

Source: Bloomberg, Goldman Sachs. Past performance is not a guarantee of future results.

While we aren’t dismissing these facts, we believe that the fear of impending recession is overblown.

We think a better characterization of the current environment is a bumpy return to an equilibrium that existed in 2015 and 2016. What characterized this equilibrium? The environment wasn’t “recessionary,” as job creation continued and the global consumer was resilient, but it didn’t feel great for investors either. Manufacturing Purchasing Manager Indices suggested flat growth at best, global trade was stagnant, falling inflation was the norm and global bond yields were low everywhere. Equity markets trended sideways, and repeated disruptive headlines caused bouts of volatility. Eventually, global manufacturing and trade rebounded, yields rose, and cyclically levered equities outperformed their defensive counterparts. However, it did take two powerful jolts of stimulus to make it happen—the first was a massive housing and infrastructure build from China, and the second was enthusiasm after President Trump’s election. 

This time around, there is good news and bad news for investors. The bad news first—we don’t think any similar jolts are likely in the near term. The good news—we also don’t think we are heading for recession.

Given our outlook, we expect more modest returns from assets, and that makes developing and implementing a disciplined, goals-based approach to investing all the more important.  

To learn more about how we see the macroeconomic backdrop, and how we think investors should be positioned, see our full piece here.





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