Bear Markets and Recessions
We all know the old joke that the stock market predicts 3 out of every 2 recessions but the table above suggests that it may true after all. Like it or not, the US sets the pace for the rest of us. So, here we are in a US bear market (defined as a market falling by 20% or more from its previous 52-week high) and many commentators are solemnly forecasting a recession in the US by 2020 and some even expect a major slump. Not so many economists are joining in, it should be noted, at least not yet but they surely will! Recessions are inevitable even if their timing is uncertain. In most countries a recession is defined as two consecutive quarters of contraction in GDP but in the US the arbiter is the independent National Bureau of Economic Research (NBER) which has its own more flexible definition: “a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales”. It is the NBER that will decide if the US economy is in recession by 2020, when/if it started and when it finished. On this basis, although a slowdown is very likely, with the US economy struggling in 2020 to grow by more than 2% (vs. the latest reported 3.4% in Q3), the NBER may well not need to make a formal proclamation. Accordingly, the more pertinent question is whether a recession in 2020, or even a major slowdown in 2019, could prolong and aggravate the bear stock market. President Trump appears to think so as he fulminates at the Fed but nobody really knows. Investors would do well to resist extrapolations from the stock market to the economy and back again and concentrate instead on the value of specific stocks, whether in the US or elsewhere.
Alastair Winter Chief Economist.
Retail is always detail...and stock market sales should be embraced
How was the holiday time shopping experience for you? Well if you look at recent comments about the Christmas trading experiences from Next (NXT), Dunelm (DNLM) and Joules (JOUL), there were sufficient bouts of consumer spending optimism to surprise a few investors positively by exhibiting pretty decent like-for-like growth levels. Retail – as the old sector saying goes – is always detail, and these three companies have shown that an old-fashioned focus on establishing a real credibility with actual or potential customers, both in physical stores as well as online, is the key to unlocking constrained purses or wallets. Others, undoubtedly, will be far less successful in this mission…but that is the inevitable outcome of innovation and change. There is a broader message here for investors in the UK market that 2019 will be a year for picking and choosing carefully. Future Brexit scenarios will continue to overhang the 2019 UK economy (and world trade discussions will continue to overhang the global economy) but picking carefully through opportunities will bring its rewards throughout this year, especially given the very low levels of faith shown by global fund managers in their low allocations to UK opportunities currently. As the world’s most famous investor Warren Buffett once noted: “Remember that the stock market is a manic depressive”. In short, be optimistic about 2019….. despite everything.
Chief Investment Officer Dynamic Opportunities UCITS Fund
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Disclaimer: Economic Insights is written for commercial companies as well as institutional and other sophisticated investors and all opinions expressed in it are solely those of the author, Alastair Winter. Economic Insights is compiled from sources the author believes to have been reliable but it may not be complete or accurate on any particular subject. All opinions, estimates and analyses are or were produced at the date of issue and are subject to change without notice. Accordingly, none of the author, Daniel Stewart & Company plc, any one or more of its directors, employees and/or affiliates, makes any representation or warranty on any subject discussed in Economic Insights; nor do they accept responsibility or liability for any claim, loss, damage, expense or cost arising from reliance upon its contents, except in the case of death or personal injury. The value of investments may go down as well as up and any income derived from them may vary as is not guaranteed. This article takes no account of your personal circumstances and is not investment advice. You should consult a professional investment adviser if you have any doubts or require advice.
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