Chief investment strategist compares inverted yield curves to fish and says economic forecast 'fairly positive'
“All trout are fish but not all fish are trout” – one analyst’s way of calming the bears down from inverted yield recession predictions.
Sam Stovall, chief investment strategist of US equity strategy at CFRA, argued against the noise coming from financial media whose Armageddon forecasts are designed to make readers and viewers “come back tomorrow”. And he said that despite nervous investors having one eye on a potential recession, things remain "fairly positive" from an economic perspective despite some speed bumps.
Regarding the trout metaphor, he explained that, while many recessions were preceded by a flat-to-inverted yield curve, not all flat-to-inverted yield curves lead to a recession. However, they did lead to the Fed starting a new rate-cutting cycle, which is what is happening today.
Speaking at the S&P Dow Jones Indices 6th Annual Toronto Masterclass, he said: “Also, we know that while we are late in this cycle, bull markets don’t die of old age, they die of fright – and what they are most afraid of is a recession.
“We need to feel that a recession is truly around the corner for this market to fall into a new bear market. Sometimes we've had recessions with no bear market, but they have always been accompanied by pretty significant corrections.
“I like to say that stock markets are like humans, and bull markets are like humans; the older they get, the more unstable they become. Basically, higher volatility is a fact of life for an aging bull market.”
So, when is a recession likely? Stovall said his economists are not looking for one right now and, further, while CFRA expects to see a slight hiccup in global economic activity, developed international markets should “probably remain flat”, while emerging markets should see an improvement.
He suggested that the US, China and Canada are on an upward trend, with the latter going from 1.4% to 1.7% growth in 2020.
Stovall also addressed one major recession indicator since 1960 – a year-on-year decline in housing starts. During this period the average was -25% while recent figures revealed a surge of 12.7% because of the favourable change in mortgage rates.
He explained: “It's not an indicator of construction, but it is of consumer confidence. Who wants to buy a home if they’re worried about losing their job?
“Consumer confidence is usually down 10% year on year before the start of a recession, yet the most recent reading was a gain of about 2%. Yes, inverted yield curves have preceded recessions; however, for a ‘precession’, the average time we have been in an inverted yield scenario has been 11 months before we do, indeed, fall into a recession. So, basically, our targets are still fairly positive.”
