Investment Insights: The odds of a 2019 recession

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Silhouette of a business man watching red and yellow trend arrows going downward to the right, with a cloudy sky visible in the background.Economists and investors alike have begun to prognosticate a looming recession, and they all seem to be pointing toward 2019.

Before anyone goes running for the hills, predicting a recession has proven to be historically tricky and even the Fed has had a poor track record of forecasting them. In fact, they did not predict any of the last eight recessions over the past 60 years, according to BCA Research and data from the Federal Reserve. It is also important to note that we are still in a sweet spot, economically and in terms of financial markets.

Equity prices continue to hold at record levels, or drive even higher, and low bond yields are in-line with the backdrop of muddle-through growth and inflation. Yes, the U.S. economy’s growth has been suppressed compared to historical data, but that may end up being a silver lining as the moderate growth has not induced the typical imbalances and bubbles that accompany the latter part of the business cycle. Our research indicates the odds of recession over the next 12 to 18 months remains quite low and we believe, barring significant shocks, we will be seeing some acceleration in the latter part of this year and next.

If we are still in a “goldilocks” zone and it is likely growth will accelerate in the coming months, what’s the problem? The issue stems from policy, which seems to be the common denominator for some of the major risks in recent years. The new administration is determined to stimulate growth, which is a welcomed effort as evidenced by the market’s reaction to the promise of tax reform and fiscal spending. However, while the government attempts to boost growth above current trend levels, the economy may not have much available slack at this point. Most economic indicators have been positive and unemployment levels seem to be consistent with an economy running at almost full capacity. Certain parts of these policies, if implemented, may add only marginally to growth, but could trigger inflationary pressures. Most of this burden will be felt in 2018 and may end up affecting policy from the Fed as they continue to tighten via rate hikes and the unwinding of the balance sheet.

The Global Investment Management team and the Bank of the West Economics team agree that the odds of a slowdown a few years from now are rising. Again, these type of predictions should be taken with a grain of salt, but we must be prepared for any outcome. We concur that the recession may likely turn out to be a mild one, if it does occur at all, and are ready to fine-tune our strategies as we approach that juncture. In the meantime, our portfolios continue to hold a slight overweight to stocks as markets march higher and yields slowly begin to make their climb.

Chart showing various market returns as of 7/11/17.

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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