recession

Stocks Plunge, What You Should Be Doing

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Americans saw a big chunk of their stock market savings disappear on Wednesday over fears of an economic recession. During a week like this, what should you be doing? What shouldn't you be doing? That's what this quick episode is all about. Keep calm and carry on!

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Financial Well-Being

Financial Well-Being

In 2013, the Federal Reserve initiated a comprehensive survey, The Report on the Economic Well-Being of U.S. Households, which attempted to provide a snapshot of people’s financial lives. At that time, just five years after the 2008 financial crisis, many were still reeling. Some had lost homes, others were forced to tap savings and retirement assets, and many were still out of work and/or contending with fewer hours.

Rooting for a Recession...and a Bear Too!

Rooting for a Recession...and a Bear Too!

I have a confession: I’m rooting for a recession -- and a bear market. Of course I don’t want people to suffer, but the longer both the expansion and bull market continue, the more we tend to forget that they can actually end, leading some to make poor financial decisions.

Recessions are like Pornography

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Obviously the election has drowned out every other topic, including economics and markets. That’s why you could be forgiven for not noticing a Wall Street Journal survey of economists, which found that the odds of a recession occurring within the next four years at nearly 60 percent. Before you add recession to your list of worries, you should know that this is hardly a bold prediction. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is the official arbiter of when recessions begin and end. Despite the oft-referred to rule of thumb that a recession occurs when there are two consecutive quarters of economic contraction, the Dating Committee does not have a fixed definition of a recession. In this way, defining a recession is like defining pornography: you know it when you see it!

The Committee examines and compares the behavior of various measures of broad activity: real GDP, real income, employment, industrial production, and wholesale-retail sales, in order to determine the highs (peaks) and lows (toughs) of the business cycle. “A recession is a period between a peak and a trough…during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.”

According to NBER, the so-called Great Recession began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months. Since 1945, there have been eleven recessions, which lasted an average of 11.1 months.

So what should we make of the current prediction of a recession within the next four years? The current expansion, which began in July 2009, has lasted 87 months through September. That may seem like a long time, but it is not crazy. The previous three expansions (1982-1990, 1991-2001 and 2001-2007) lasted 92, 120 and 73 months respectively. That said, making a prediction that we could see a recession over the next four years does not seem particularly like going out on a limb.

And yet, economists are not particularly good at predicting when a recession might actually occur. In his book The Signal and the Noise: Why So Many Predictions Fail--but Some Don't, Nate Silver interviewed Jan Hatzius, the chief economist of Goldman Sachs, to find out why so many economic predictions miss the mark. “Nobody has a clue. It's hugely difficult to forecast the business cycle. Understanding an organism as complex as the economy is very hard.” The reason it is so hard is that statistics can be noisy, the economy is always changing and the data on which forecasts are based can be flawed.

MARKETS:

  • DJIA: 18,138, down 0.6% on week, up 4.1% YTD
  • S&P 500: 2133, down 1% on week, up 4.4% YTD
  • NASDAQ: 5214, down 1.5% on week, up 4.1% YTD
  • Russell 2000: 1212, down 2% on week, up 6.8% YTD
  • 10-Year Treasury yield: 1.80% (from 1.72% week ago)
  • British Pound/USD: 1.2188 (from 1.2243 week ago)
  • November Crude: $50.32, up 1.1% on week (fourth consecutive week of gains, longest weekly winning streak since April.)
  • December Gold: $1,255.50, up 0.2% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.26 wk ago, $2.30 a year ago)

THE WEEK AHEAD:

Mon 10/17:

Bank of America, IBM, Netflix

8:30 Empire State Mfg Survey

9:15 Industrial Production

Tues 10/18:

Goldman Sachs, Intel, J&J, Yahoo

8:30 CPI

10:00 Housing Market Index

Weds 10/19:

American Express, eBay, Morgan Stanley

8:30 Housing Starts

2:00 Fed Beige Book

Thursday 10/20:

Microsoft, Verizon

8:30 Existing Home Sales

10:00 Leading Indicators

Friday 10/21:

General Electric, McDonald’s

Leap Day for Investors

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Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.

Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services.  More importantly, households can keep up the pace, as income growth was robust.”

There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.

Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:

  • Deceleration: Every classical business cycle slows before it contracts, so look for a pronounced slowdown first. While Q4 looked weak, there is ample evidence that there will be a recovery in Q1.
  • Diffusion: The weakness must be widespread across industries. Outside of energy and manufacturing, activity in the rest of the economy appears to be OK
  • Depth: Broad indicators such as employment, income, production and sales need to contract by at least 1.5 percent from their cyclical peaks.
  • Duration: The NBER looks for a period of at least six months of contraction in the economy to be convinced that the episode was a recession

MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.

  • DJIA: 16,640 up 1.5% on week, down 4.5% YTD
  • S&P 500: 1948 up 1.6% on week, down 4.7% YTD
  • NASDAQ: 4590 up 1.9% on week, down 8.3% YTD
  • Russell 2000: 1037, up 2.7% on week, down 8.7% YTD
  • 10-Year Treasury yield: 1.77% (from 1.61% a week ago)
  • Apr Crude: $32.78, up 3.2% on week
  • Apr Gold: $1,223, down 1% on week
  • AAA Nat'l avg. for gallon of reg. gas: $1.74 (from $1.72 wk ago, $2.37 a year ago)

THE WEEK AHEAD:

Mon 2/29:

9:45 Chicago PMI

Tues 3/1:

Dollar Tree

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Mfg Survey

10:00 Construction Spending

Weds 3/2:

8:15 ADP Private Jobs

Thursday 3/2:

Costco

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Survey

Friday 3/3:

8:30 Feb Employment Report

Will the Fed Cause the Next Recession?

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A few weeks ago, our economic and market problems were widely seen as the fault of a slowdown in China, plunging oil and a rising dollar. Now there’s a new culprit: central banks around the globe. The Wall Street Journal devoted an editorial to the topic and the NY Times featured a print edition headline “New Fear That Central Banks Are Hindering Global Growth” (they changed the HED for the online version.) The prevailing fear among investors last week was that U.S. central bankers, along with their developed economy counterparts in Europe and Japan, are pursuing or considering policies that will trigger the next recession – specifically, unlike the market’s buoyant reaction to large bond purchases (Quantitative Easing) to prompt growth, investors are less sure about the efficacy of negative interest rates.

Let’s step back and think about this: The idea of charging banks to leave money on deposit with a central bank is meant to spur more lending, borrowing and spending for weak economies which are struggling amid deflationary forces. Like QE, pushing rates into negative territory should eventually boost growth and inflation. But the problem may not be the policy itself, but with the way central banks have communicated its benefits. According to Capital Economics, “the hesitant way in which they [the policies] have been introduced has undermined confidence, raising the risk that negative rates do more harm than good.”

No policy endeavor is without unintended consequences. Negative deposit rates will hurt banks, harming their profitability and potentially their willingness to make new loans. But more importantly, the concept of negative rates is being seen as a central bank Hail Mary. The thinking is “if they’re willing to go negative, they must have really run out of options!” That may be a purely emotional (after all, the Fed could start QE again if it wanted to do so), but who said that investors were rational?

Meanwhile, back in the real economy (vs. the stock market), there continues to be little evidence of a slow down outside of the energy and manufacturing sectors. In fact, on the back of decent jobs report, the government said Retail Sales were better than expected. The “control group”, which excludes the volatile categories of autos, gasoline and building materials, rose solidly in January. Economists pay attention to the control group because it closely mirrors the consumption portion of Gross Domestic Product. According to economist Joel Naroff, the “retail sales numbers don’t point to a recession coming any time soon.”

MARKETS: You know it’s a rough week when a 2 percent move on a Friday can’t save it. Even if there were some optimists in the buying crowd at the end of the week, chances are that much of the activity derived from short sellers buying back shares to lock in profits before a long holiday weekend.

  • DJIA: 15,973 down 1.4% on week, down 8.3% YTD
  • S&P 500: 1864 down 0.8% on week, down 8.8% YTD
  • NASDAQ: 4337 down 0.6% on week, down 13.4% YTD
  • Russell 2000: 972, down 1.4% on week, down 14.4% YTD
  • 10-Year Treasury yield: 1.74% (from 1.84% a week ago)
  • Mar Crude: $29.44, down 4.7% on week (despite Fri’s massive 12.3% rise, the largest one-day percentage gain since January 2009)
  • Apr Gold: $1,239.10, up 7.1% on week, best week since Dec, 2008)
  • AAA Nat'l avg. for gallon of reg. gas: $1.70 (from $1.75 wk ago, $2.24 a year ago)

THE WEEK AHEAD: After a better than expected retail sales report, investors will focus on earnings from Wal-Mart and Nordstrom.

Mon 2/15: US Markets Closed for President’s Day

Tues 2/16:

Cheesecake Factory

8:30 Empire State Mfg Survey

10:00 Housing Market Index

Weds 2/17:

Gannett, T-Mobile, Williams Cos

8:30 Housing Starts

8:30 PPI

9:15 Industrial Production

2:00 FOMC Minutes

Thursday 2/18:

Nordstrom, Starwood, Wal-Mart

Friday 2/19:

Deere

8:30 CPI

Recession Fears Escalate

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The recent turmoil in global markets has wiped out about $4 trillion in value this year. It has also spurred a new round of recession calls. It’s been nearly seven years since the last recession and while there is a case to be that we might be due for one, the folks at Capital Economics note “Since 1960, the average period between recessions has been eight years in the U.S…so the current expansion is not particularly long in the tooth.” It’s also worth remembering the old joke line, “Markets have predicted nine out of the past five recessions.” Economists are trying to figure how to square the divergent signals. There is no doubt that the U.S. manufacturing and energy sectors are in a recession. But whether the other parts of the economy will join is unclear. Overall employment gains have been strong, housing just completed another solid year of recovery and consumers are happily sitting atop extra savings, due to the drop in oil. (It is estimated that households saved $120 billion on energy related products last year.)

But, there is a real concern that if oil resumes its downward slide, it could spark a contagion. So far the evidence is not there, though it may appear this week, when the first estimate of fourth quarter growth is released. The consensus estimate is for GDP to slow to 0.8 to 1 percent. That would mean that 2015 GDP was likely 2 percent, in line with all of the slow growth years of this recovery:

  • 2010: +2.5%
  • 2011: +1.6%
  • 2012: +2.3%
  • 2013: +2.2%
  • 2014: +2.4%
  • 2015 est: 2%

Sluggish growth combined with volatile markets will likely keep the Federal Reserve on the sidelines for this week’s FOMC meeting. Most expect that the central bank statement will acknowledge greater risks to financial stability and moderation in economic activity. Traders are hopeful that the Fed also provides a hint about the March meeting—and specifically that the bankers will not raise rates if current conditions persist.

Even if there is no explicit mention, many believe that the Fed showed its true colors at last September’s meeting, which followed a similar concern about global growth and violent moves in financial markets. At that meeting, the Fed said, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.” Sound familiar?

MARKETS: Markets ended the week on a positive note, but we are still down significantly since the start of the year. Energy markets showed signs of life in the last two trading sessions of the week, though we will only know if the bottom has been reached with the benefit of hindsight.

  • DJIA: 16,093 up 0.7% on week, down 7.7% YTD
  • S&P 500: 1907 up 1.4% on week, down 6.7% YTD
  • NASDAQ: 4591 up 2.3% on week, down 8.3% YTD
  • Russell 2000: 1020, up 1.3% on week, down 10.1% YTD
  • 10-Year Treasury yield: 2.06% (from 2.04% a week ago)
  • Mar Crude: $32.19, up 9.4% on week
  • Feb Gold: $1,096.30, up 0.5% on week
  • AAA Nat'l avg. for gallon of reg. gas: $1.84 (from $1.91 wk ago, $2.04 a year ago)

THE WEEK AHEAD:

Mon 1/25:

Halliburton, Kimberly Clark, McDonald’s

10:30 Dallas Fed Manufacturing Survey

Tues 1/26:

DuPont, P&G, Apple

FOMC Policy Meeting begins

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 1/27:

Boeing, J&J

10:00 New Home Sales

2:00 FOMC Meeting Announcement

Thursday 1/28:

Caterpillar, Ford, Amazon.com, Visa

8:30 Durable Goods Orders

10:00 Pending Home Sales

Friday 1/29:

American Airlines, Abbvie, Honeywell, Chevron, MasterCard Colgate-Palmolive

8:30 Q4 GDP-first estimate (Q3=2%)

8:30 Employment Cost Index

9:45 Chicago PMI

Does Plunging Oil Portend Recession?

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Crude oil has tumbled 15 percent in the past ten trading session, approaching the summertime low of nearly $40 a barrel. That means it’s time for one of the favorite economic themes of 2015: “Plunging demand for oil is the harbinger of a recession”. As recounted many times in this space, there has indeed been a drop off in activity in China and those emerging markets, which rely on trade with the world’s second largest economy. But surprisingly, as demand for oil has drifted down, supply has increased. That’s not supposed to happen, at least in the econ textbooks. You know how it works: demand weakens, prompting suppliers to cut back and then prices start to climb back up. But around the globe, production levels have remained robust. US, Russia, Saudi Arabia and other Persian Gulf states are keeping the spigots open, creating a glut of oil.

The good news is that gas prices have resumed a downward slide. AAA says that the average price for a gallon of regular gas is $2.18, down from $2.91 a year ago, with prices below $2 in many areas. AAA spokesman Avery Ash said “It looks increasingly likely that drivers will find the cheapest gas prices for both Thanksgiving and Christmas in seven years.”

Lest you think that Americans will use those savings at the pumps and beef up their holiday purchases, don’t bet on it. As gas prices have careened lower this year, there has been little evidence that consumers are spending it freely in the economy. Instead, they have been beefing up their cash reserves or saving for large purchases, like cars.

That parsimonious trend has been bad news for US economists, who have been hoping that our retail instincts would kick in and boost growth in the fourth quarter. It also may worrisome for the nation’s retailer’s, some of whom (Macy’s, Nordstrom) have been struggling, as the all-important holiday season is about to kick off.

But, wait…where’s that holiday optimism? OK, here it is: the last jobs report was really good, the service sector continues to advance and according to the Federal Reserve, “household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further.” That sounds pretty decent and not at all like a recession is imminent.

MARKETS: Investors broke a six-week winning streak in stocks, producing the largest percentage losses since the week ended August 21st.

  • DJIA: 17,245 down 3.7% on week, down 3.2% YTD
  • S&P 500: 2,023 down 3.6% on week, down 1.7% YTD
  • NASDAQ: 4,927 down 4.3% on week, up 4% YTD
  • Russell 2000: 1146, down 4.4% on week, down 4.8% YTD
  • 10-Year Treasury yield: 2.28% (from 2.32% a week ago)
  • Dec Crude: $40.76, down 7.9% on week (biggest weekly loss in 7 months)
  • Dec Gold: $1,080.90, down 0.6% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.91 a year ago)

THE WEEK AHEAD:

Mon 11/16:

8:30 Empire State Manufacturing

Tues 11/17:

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 11/18:

8:30 Housing Starts

2:00 FOMC Minutes

Weds 11/19:

10:00 Philly Fed

Weds 11/20: