LPL Financial Market Signals Podcast

On the Recession Watch l LPL Market Signals Podcast

November 18, 2019

LPL Research

With the S&P 500 at record highs, our outlook remains optimistic, but we don’t want to be complacent. We take a look at some of our favorite leading indicators to see if any cracks are forming in the economic expansion and its accompanying bull market.

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The S&P 500 Index gained for the sixth consecutive week, with various other global markets making new highs as well. Even though we feel good about things, we believe it’s always good to have a recession watch check-in.

NO MAJOR WORRIES OF A RECESSION

We look at various indicators to see how close we could be to an impending recession. We created what we call our Five Forecasters chart, which looks at a variety of perspectives and helps capture a more complete view of the economic and market environment. Currently three of the five are flashing “on watch,” while the other two are still firmly in the no-recession camp.

ON WATCH

The yield curve inverted recently, which could be a warning sign as all nine recessions back to 1955 started with an inverted yield curve. After three rate cuts by the Federal Reserve, the curve has steepened significantly, which is good news. Another worrisome sign is that U.S. manufacturing continues to weaken; however, manufacturing makes up about 12% of GDP, so it has a small role in the overall economy. The consumer is still quite healthy, which should negate the manufacturing weakness. Finally, the Conference Board’s Leading Economic Index (LEI) is one of our favorite economic indicators because of its predictive power: The Index has turned negative year over year an average of 14 months before every recession since the 1970s, and it has turned negative year over year before every recession back to the 1970s. The recent LEI rose 0.4% year over year in September, nearing a negative print. The good news is the U.S. economy peaked last September, so the year-over-year comparisons should turn much easier over the coming months.

NO LATE CYCLE WORRIES

While stocks are certainly more expensive relative to earnings than they were when this bull market began, we consider stocks fairly valued in this environment, especially considering low levels of interest rates and modest inflation. Market breadth remains very strong with many stocks, sectors, and countries participating in this global rally.

THANKFUL

To celebrate Thanksgiving, we are thankful that this bull market shows no major signs of slowing. In fact, one of the reasons it could continue is we still aren’t seeing some of the signs of excesses that we’ve seen at major market peaks. From overspending, overleverage, and overconfidence, we simply aren’t seeing the signs that have killed bull markets in the past. We don’t think bull markets die of old age—they die of excesses, and we aren’t seeing these excesses pile up just yet.
 

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Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunesGoogle Play, or Spotify.

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IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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