Could The U.S. Economy Go into A Recession in 2018?

by Paul Dietrich, CEO Fairfax Global Markets, September 10. 2018

The underlying U.S. economic fundamentals always drive the long-term direction of the U.S. economy and stock market.  In the history of economics, we have no evidence there has ever been a recession when earnings were going up, employment was going up, wages were going up, housing was going up, GDP was expanding, and the index of leading economic indicators was going up.  It’s never happened—I don’t believe it ever will!

There is an old adage that in the short term any crazy political, natural disaster or global incident can negatively impact the stock market temporarily, but in the long term the stock market follows the underlying fundamentals of the U.S. economy.  If the economy is trending up and expanding, the stock market will follow.  In the history of economics, the U.S. has never had a recession/bear market while the underlying U.S. economy was expanding and trending upward.

How Do You Know If the U.S. Economy Reaching a Peak?

 Investors are now experiencing the longest economic expansion in U.S. history.

Here is why the U.S. economy should continue to grow through 2018:

• According to FactSet, 2018 S&P 500 earnings are expected to grow in double digits by 4%.
• A continued tight labor market and low unemployment. S. jobless claims are now at a 44 ½-year low.  This decline in the number of Americans filing for unemployment benefits points to a strong rebound in job growth.
• Increased manufacturing coming to the U.S. and continued growth in manufacturing jobs. A rise in U.S. manufacturing and the use of manufacturing technology has dramatically caused the U.S. to become the second-most-competitive country in the world, moving up to an eight-year high in global rankings according to the World Economic Forum.  S. manufacturing surged to a 13 ½-year high in December.  The lower corporate tax rate will also help American manufacturing be more competitive.
• Small business optimism is at a 34-year high according to the National Federation of Independent Businesses.
• Lower energy and natural gas prices compared to the rest of the world due to fracking.
• The U.S. housing market has recovered from its near-death experience in 2007 and 2008.
• Continued low inflation growing at a slow pace. Worldwide low inflation rates are due to relatively low commodity prices for oil, gas and materials, productivity gains based on technology, as well as, an aging worldwide population and a slowdown in population growth.
• And strong synchronized global growth in the U.S., Europe and Asia is igniting growth in the rest of the world. The OECD predicts 3.7% global growth in 2018.

Given this global economic expansion and the strong underlying U.S. economic fundamentals, I believe it is unlikely we will see another recession or bear market before the Spring or Summer of 2019.  Because of the passage of the tax reform legislation and increased earnings, that could postpone the next recession further into the future.

(source: Reuters & FactSet)

What Could Turn the Economy into A Recession?

Stock Market Volatility:  Investors Need To Distinguish Between “NOISE” and “ECONOMIC FUNDAMENTALS.”

At almost ten years, the current economic recovery is one of the longest on record.  Personal income, consumer spending, household assets, and net worth, are all at record highs.  Corporate profits are within striking distance of all-time highs.  Almost all the leading economic indicators are in positive territory and, according to the IMF, world growth is expected to rise this year to 3.5% and, in 2018, to 3.6%.

Despite short-term stock market volatility caused by too much good economic news, or by political and foreign policy issues, the facts are: the U.S. and the global economies are powering upward in a stable and robust march forward.

Investors always need to be able to distinguish whether stock market volatility is caused by (1) political or foreign policy issues or (2) more serious underlying economic issues.

Investors always need to ask the question, “Does today’s “breaking news” change the outlook for the economy or corporate profits?  Are people still going to go to work tomorrow in Detroit and Atlanta?”

If the issue doesn’t affect the underlying U.S. economy or a person’s ability to work, investors should ignore the stock market volatility and not panic.  When the stock market goes down because of political or foreign policy issues, it is almost always a short-term correction if the problem does not affect the long-term economic fundamentals of the overall economy.

These stock market corrections and pullbacks usually last only a month or two, and, when investors see that the issue does not impact the underlying economy, the market recovers quickly.  In these situations, investors who panic and sell, almost always lose money.