Market Recap

Posted on June 22, 2018 by Gemmer Asset

image_printPrintable Version



A New Recession Call


With President Trump’s new trade agenda and fears about Fed policy inverting the yield curve, the drumbeat of recession calls is picking up.


This week David Rosenberg of Gluskin Sheff & Associates garnered a lot of attention by calling for a recession in 12 months (read more here).


Rosenberg has been unfairly tarred as a perma-bear over the years. He was certainly bearish in the late 90’s and mid-2000s, but he is a flexible analyst who has been bullish the last few years. He resisted calling for a recession in 2011 when many others made the mistake of moving to the dark side.


Rosenberg’s argument is straightforward:


1) Higher inflation in the months to come forces the Fed’s hand.


2) The Fed needs to tighten by at least another 100bps just to get to neutral.


3) Tight monetary policy will invert the yield curve in the second half of 2018, possibly after the September hike.


4) A recession will follow with a lag, say by the middle of next year.


Not So Fast


Tim Duy posted a retort on Friday that is worth a read.


He doesn’t argue against a recession, only that Rosenberg’s timing is off.


“Recessions don’t happen out of thin air. Data starts shifting ahead of a recession. Manufacturing activity sags. Housing starts tumble. Jobless claims start rising. You know the drill, and we aren’t seeing any of it yet.”


Maybe we are biased (OK, we are biased) because we’ve made similar arguments recently (see our yield curve piece here), but for a recession to start in the middle of next year we need to see the data turn down now. However, if anything, the odds favor just the opposite through September at least, especially in the labor markets.


Goldman published a piece this week in a similar vein. Yes, recession risks increase in 2019, but they put the odds at just 18%. Odds go up to 1 in 3 in 2020, as you can see below.




Tim Duy also makes an important point that Fed policy isn’t on autopilot. There is a distinct possibility the Fed takes a pause after the December hike, especially if inflation isn’t bubbling to the surface.


“Also, we really shouldn’t discount the possibility that the Fed pauses even before a yield curve inversion. A market disruption from a trade war or external financial crisis that threatens to spill over into Main Street could put the Fed back on the defensive. So the whole story that the Fed will soon kill this expansion is a bit premature.”


Ironically, any market correction in the second half of 2018 could be the pause that refreshes for stocks at least. If trade jitters, for example, trigger another market correction, it would be a brave soul indeed who would bet the Fed would blindly keep raising interest rates.


Divergent calls like this are what makes markets. We come down on the side of Tim, though. Until we see the hard economic data start to deteriorate we think it is too soon to make the recession call. It will come, but not just yet.


Have a good weekend.



Charles Email Sig



Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.


Bookmark and Share