A sluggish global economy and signs that the relatively hot U.S. economy has finally started to cool have recently combined to trigger a risk-off phase. By most metrics, global risk assets are now discounting a recession. Various factors are cited as to why growth will slide into recession, including heightened trade/geopolitical tensions, fears that the Fed has, or will, over-tighten the monetary screws, and concerns that the Chinese economy is finally going to derail.
While we are more sanguine on the Fed and China than the consensus, trade worries are a valid concern. The U.S. and China will have to come to a truce in the current quarter or the global business sector may well progress from just deferring investment and hiring, to outright retrenching, thereby validating current pessimistic market forecasts. Last week we noted that this was the third equity bear market this decade, and that the prior two overstated the economic risks and proved to be buying opportunities. Based on the past relationship between recessions and bear markets, there is still downside price risk IF a recession looms. However, if only a moderate slowdown occurs, as we expect, then today’s gloom will give way to better financial markets beyond the near run.