Markets Take on a Friendlier Tone
After a miserable January and February in the financial markets, it seems like the clouds are starting to clear and good news is starting to filter its way into the markets. Specifically, job growth has remained reasonably strong, manufacturing appears to be rebounding, oil prices seem to have bottomed, and, in general, global policymakers seem to be generally inclined toward "easy money" policies which should help stave off recession in the major foreign markets that have the capability to effect our own economy.
We are not all wearing rose-colored glasses, however. In general, the data that we are seeing definitely suggests that we are entering into the "Late Stage" of the economic cycle. This "Late Stage" is typically marked by market volatility, rising interest rates, increased inflation, and rising commodity prices. Historically, the Late Stage lasts anywhere from one to three years - and in nearly all historical cases, despite the market's volatility... stocks still have given better returns than virtually anywhere else we could choose to invest.
This period of the economic cycle is typically one of the most frustrating periods for investors. Every time any sign of economic weakness emerges, the doomsday prognosticators come out in force, hoping that they will be the ones to finally "call it" so they can then turn around and say "see, I told you so" when the inevitable recession finally DOES occur. So, with markets being volatile anyway, the media tends to exacerbate the situation by running "click-bait" headlines, fear inducing commercials, and sensationalized news stories designed to plump up their own profits at the expense of the average American investor.
The fact of the matter is that the economy IS beginning to slow. This is normal and a natural part of every economic cycle. I believe that the recent market sell-off was a bit overdone, and we should begin to see some measurable growth in the markets going forward - at least until the next new challenge - which may well be Britain's possible exit from the European Union (BREXIT). The challenge, as always, is WHERE to deploy dollars so they have the highest potential for growth until the end of the economic cycle becomes apparent without taking terribly too much risk.
To that end, we maintain portfolios designed to each investor's risk tolerance - with the equity portions mostly large, well developed companies, and with a slight tilt toward energy (this is new), technology, and health care. Currently, there is NO real opportunity elsewhere for growth with minimal risk, although bonds - both investment grade and high yield - are starting to look more attractive than they were previously.
With the most recent data, the current odds of Recession (as predicted by Recession Alert) are:
<2% chance that we are in a recession NOW and don't know it yet
11% for recession to begin within the next 3-4 months
19% for a recession to appear within 6 months
Of the 9 "Recession Component" indices we track, currently 2 of the 9 indicate a recession. Normally a recession call is made only when 4 or more components indicate a recession. Last month, 3 of the 9 were in recession territory but one of the components improved. Since we don't normally publish the number of recession components indicating recession when we address the odds of a recession, to put things in context, it is important to note that several times since 2008 there have been 1-2 components signaling recession. In 2010, 3 components signaled recession before improving.
The other recession probability models to which we subscribe suggest similar conclusions; we are not headed for a recession immediately, but the odds of it happening continue to rise. If the economy does "roll over" into a recession, perhaps as a result of a global slowdown, we should see it in the data and the models before too much damage is done - especially with the labor markets remaining strong. Additional good news is that the markets are generally improving, so we should see the effects of some better returns on our statements soon.
Until next time,
Jon Castle is Managing Partner and Chief Investment Officer of PARAGON Wealth Strategies, LLC. His complete bio can be viewed here:
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