Are we Headed Towards a Recession?

August 30, 2019

 

Market and Performance Update – “The Stock Market has fallen 800 points!  Does that point to a Recession?”  “The Yield Curve has Inverted… a sure sign of Recession!”  Do headlines like these cause you to be concerned about your investments?  They probably do… and they should!  The USA went into our last recession in 2009, over ten years ago.  The stock market has had its longest bull run in history.  So it’s time, right?  Other country’s economies are suffering now, and if they go down, we’ll go down.  Isn’t that true?  Yes, it is true.  The question isn’t if we’re going to have a recession, it’s when will it start?  For us to try to figure that out, however, it’s important to look at data that may disagree with our pre-conceived notions, as well as data that agrees with them.  The stock market really started rocking at the beginning of August.  Volatility like that tends to worry us.  The Dow was down 1385 points (5%) during the first two weeks of the month.  So the pessimists started chattering about this being the beginning of a recession, almost like they were rooting for it.  And for a short time the two year treasuries were paying slightly more than the ten year bonds (inverting the yield curve), and that threat still exists.  However, the FED lowering interest rate does relieve the pressure on a potential yield curve inversion.  Continuing on the positive side we find that the U.S. economy still looks fundamentally healthy. GDP growth is averaging above 2% on an annualized basis (2Q). Retail sales are solid. Wages are rising in excess of inflation. Job growth is strong and the unemployment rate is well below 4%. If we just look at the domestic data, the U.S. economy remains in good shape.  Given these domestic conditions, the base case is that the U.S. economic expansion isn’t immediately threatened by slowing economic growth elsewhere in the world. However, any further deterioration in the trade environment, with China and our other trading partners, could raise the risk of a recession.  Because of that potential, we remain vigilant.  We get daily research briefings.  And so far our three indicators are mixed, two positive and one negative.  So we remain in our neutral strategies.  Our Harmony Conservative Model is in Bonds, our Harmony Moderate and Harmony Growth Models are in the Calendar Effects strategy, and our Harmony Aggressive Plus model is in the Buy/Replace strategy.  Since the market low on 8/14, it has recovered some of its losses.  Should all of our indicators turn positive again, we will immediately go back to our positive strategies.  Sometimes it’s tough being a rules based asset manager.  But over all, not letting one’s emotions dictate what we do is a good thing.  

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