Years of concern over deficits and paying the debt seem to be moving to the forefront. But not just government debt. While markets continue their historic run, and warning signs have proven not to be a threat to market gains as we have seen in the recent past, there are several recent warning signals whose track record of preceding an economic downturn (i.e. recession) are almost 100%. As the economy recedes, stocks will go with it.
Last week we discussed the upward movement of oil and how it sends a mixed signal to where the economy may be going next … but it is usually an inflationary signal which ultimately hurts consumer spending.
This week, three critical variables could play a huge factor in where the economy will go for 2018, and whether or not the dreaded “R” word makes its return.
I. What are three critical variables that could hurt the economy, and which could drive stocks lower for the remainder of 2018?
- “Budget deficit and unemployment going in opposite directions for the first time since World War II”: Not since World War II have we seen the unemployment rate going down … and the budget deficit going up! Goldman Sachs lists this inversion as the most dangerous trend for the economy this year, and almost assures us of breaking 3.5% on the Fed funds rate. Needless to say, servicing the debt becomes problematic as the Fed funds rate goes up.
- “Yield curve inversion on the near horizon”: The spread between the 2-year Treasury note and the 10-year Bond is at its lowest since 2008 … only 40+ basis points. If the spread turns negative, this is called a “yield curve inversion.” Bottom line, the last 7 times the yield curve has inverted, we entered a recession the next quarter.
- “Checking account balances and savings are highest since 1991”: Typically, when people believe things are going well, they spend more and save less. When they fear things are going badly, or that they will in the near future, they save for the proverbial “rainy day.” As of May 1st, the average checking account balance in the United States is $3,700.00!!!. That number was last seen in 1991. The median average for US checking accounts is typically around $2,300.00, and it shrunk to its lowest on record in 2007, at $900.00 on average. Yes, Americans have cash on hand. The problem is, if history is a guide, that shows fear, not confidence, in the future.
II. What are three factors that support continued economic expansion and stock market growth in 2018?
- “Trade fears are diminishing”: While there are major sticking points to NAFTA renegotiation, and Chinese/American competition can alter the entire global marketplace, there is a sense among most analysts that any trade complications is baked into current stock prices. US industries, so far, seem to be taking trade conflict in stride.
- “Low unemployment means businesses are confident”: For the first time since December 2000, there are as many job openings as those counted as unemployed. That is an unprecedented accomplishment for President Trump and his policies. Businesses are confident, and that means businesses are hiring.
- “Market remains on a winning streak”: Sometimes momentum can propel stocks, and economic expansion, all on its own. We may be in such a period, since there are headwinds in front of us as described above yet we keep seeing record numbers across the economic spectrum.
There are more headwinds, and also more positives, than just one blog can cover. But it is enough to see that certain variables have a near full-proof record of predicting economic downturns and knowing the right time to “time” the market is a difficult risk to measure. Having your money safe in the first place is one way to mitigate against such risk.
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