Economic reports that were delayed due to the government shutdown trickled in to reveal an economy slowing a bit more than expected in early 2019. Raymond James' Chief Economist Scott Brown notes that while recession is not the most likely scenario in the coming year, the risk is rising and the odds will rise even more if the yield curve (the spread between short term interest rates and long term interest rates) further inverts. He thinks the economy will continue to advance in 2019, but at a slower pace than last year with risks to that outlook tilted to the downside.
The inverted yield curve certainly deserves investor attention, as it has been one of the more reliable recession indicators. However, Joey Madere, senior portfolio analyst, Equity Portfolio & Technical Strategy, cautions investors from overreacting, as more time is needed to see if the inversion deepens, is longer lasting, and if economic disappointments start to build. In his opinion, the economic data reflects a slowdown, not a contraction. Leading economic indicators seem to support this view, at least in the U.S.
That is not necessarily the case across the pond, where China reported its lowest economic growth target in a generation. Concern about the slowing global economy contributed to the central bank here tabling its planned interest rate increases. Throwing more fuel on the market's fire, most Federal Reserve policymakers now expect to leave short-term interest rates unchanged over the course of the year, and the federal funds futures market is pricing in about a 65% chance that the Fed will cut rates by the end of the year.
Perhaps an indication of how little many investors care about the market risks at the moment, the S&P 500 index just had its best quarter since 2009, according to data from Bloomberg. Most U.S. markets have bounced quickly back toward all-time highs following the dismal performance of the previous quarter. Blackrock's CEO, Larry Fink says he is more concerned about a melt-up, rather than a meltdown, with investors potentially chasing rising stock prices, rapidly pushing them to higher, often unsustainable levels. That kind of market activity is not uncommon late in the economic cycle, and can exacerbate subsequent declines. The market's unusually strong start this year could be the beginning of just such a phenomenon, should it continue without some moderation.
Leading Economic Indicators are selected economic statistics that have proven valuable as a group in estimating the direction and magnitude of economic change. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The S&P 500 is an unmanaged index of 500 widely held stocks.
The information above represents the opinion of financial advisors Travis Rus, Michael Kernan, and Chris Winther, and is not necessarily that of RJFS or Raymond James. It is not a complete summary of all available data necessary for making an investment decision, and does not constitute a recommendation. Nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss.
