In July 2019 the U.S. economy entered its 11th year of expansion. Though a strong US consumer continues to prop up this expansion, trade uncertainty and an inverted yield curve have headlines calling for an end. The United States led global recessions in 1975, 1982, 1991, and 2009. We do not believe 2019 to be the same case. Low unemployment, low household debt service ratios, solid wage growth, and near-record consumer net worth should allow the US consumer to keep the global economy from slipping into a recession. Risks have indeed risen, and we will be watching to see if sentiment and labor markets deteriorate, but we still do not believe that a recession is the most likely outcome.
Our Investment Process
Our investment committee is meeting regularly to monitor the fundamentals of the markets. Using our plethora of resources we have developed a base case of a slow growth economic environment, but we have game plans should we see a recession, high inflation, stagflation or even higher than expected growth. We know that times like these can feel like an emotional roller coaster for investors, but we remain focused on the details and are prepared from both portfolio management and planning perspectives for multiple outcomes.
What We Are Watching
- Trade Wars: Concerns about slowing global growth and uncertainty around trade has damaged business confidence and slowed capital expenditures. A near-term fix for the US China trade conflict looks less likely, but labor markets have not yet shown signs of disruption and any fundamental declines have been modest. There is a possibility that other countries pick up the slack left by China, for example Japan agreed in principle to a trade deal with the US last weekend. We also note that China represents ~7% of total US exports. Please see our recent article U.S. – China Trade War: Continued Negotiations, Escalation or New Deal for greater detail.
- Inverted Yield Curve: The yield curve is created by taking the yields of bonds from the same issuer (for example the US Treasury) and plotting them by increasing maturity. Typically the yield curve is upwards sloping because longer term bonds have increased risk due to uncertainty, and investors require a higher return for that increased risk. Long-term bond yields are much more sensitive to changes in economic factors such as GDP growth and inflation. Short-term bond yields are much more sensitive to decisions by the Federal Reserve. A yield curve inverts when shorter-term yields are higher than longer-term yields. Typically it’s a sign that investors are nervous about long-term economic growth and that they believe the Federal Reserve must decrease interest rates. A yield curve inversion is a signal, not a cause, of a recession. The inversion does not tell us when or where a recession will come. Sometimes recessions have come as short as six months after an inversion. Sometimes recessions have come as long as 2.5 years after an inversion. Further muddying the signal are unconventional monetary policies (quantitative easing) that that could be artificially influencing the yield curve and negative foreign yields that continue to drive global investors to purchase long-term US bonds. As of right now we are not changing our portfolio positioning at this time due to the yield curve inversion.
Source: J.P Morgan Asset Management
The US consumer continues to hold a leading share of World GDP followed closely by China (see chart). This is why we believe a global investment approach best serves our clients over the long-term and why we have faith in the US consumer shielding the US from an imminent recession.
Source: Strategas, C.J. Lawrence
Synergy Capital Solutions is a group of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
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This document was created for informational purposes only; the opinions expressed are solely those of Synergy Capital Solutions and do not represent those of HighTower Advisors, LLC, or any of its affiliates.