Why recession is hot topic despite positive signs
There are few signs of an impending recession. So why is everyone using the "R" word? Wall Street's thinking goes like this: Flat returns in the stock market make it harder for the Federal Reserve to raise interest rates, and in turn, the Fed's lack of action concerns investors about U.S. economic expectations.
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There are few signs of an impending recession. So why is everyone using the "R" word?
Wall Street's thinking goes like this: Flat returns in the stock market make it harder for the Federal Reserve to raise interest rates, and in turn, the Fed's lack of action concerns investors about U.S. economic expectations.
That's the feedback loop, as explained by local strategists and money managers.
Guy LeBas, fixed-income strategist at Janney Montgomery Scott in Center City, dove into the details.
"Fear and risk-aversion are competing with deteriorating economic expectations. The markets are now basically pricing in zero rate hikes for 2016," he said in an interview.
"The upshot is more people are talking about the 'R' word."
Cross-currents include the following: Headline economic numbers are coming in fairly well, including one of the longest stretches of job gains in history. Yet consumer spending has downshifted to 2 percent annual growth from a 3 percent rate, LeBas notes.
In Wall Street's view, "that leaves the economy broadly vulnerable, because a 2 percent rate makes it more likely some shock could cause a short-lived recession," LeBas adds.
How do investors hold their boats steady in such as environment? LeBas is telling clients to avoid intermediate-term debt and stick with short- and long-term bonds.
Rosemary Caligiuri also likes short-term bonds, such as Vanguard's Short Term Corporate Bond ETF (VCSH).
But she's advising clients to avoid Treasuries altogether, and to avoid investing in energy until prices settle down.
"This volatility is just the new normal," says Caligiuri, managing director at United Capital in Langhorne.
The post-financial crisis Fed stimulus "was such a false positive in the markets. As that is withdrawn, we will see extended higher volatility. Days with 400-point moves are our new normal."
She reminds investors that the stock market peaked most recently back in July 2015, and has fallen 10 percent since then, a typical correction.
"Markets fall 10 percent every 72 trading days, and fall 20 percent every 680 days. So if this is just a return to normal, we don't want to make any wholesale changes" in client portfolios.
"With clients, a lot of the time we barely talk about the market. They know they're on track. We talk about the emotions that go with the volatility."
Big in Japan?
David Kotok, chairman and chief investment officer of Vineland, N.J.-based Cumberland Advisors, is bullish on Japan.
No really! It doesn't matter that Japan's stock market hasn't budged for the better part of two decades.
He's bullish on and has been a buyer of EWJ, a hedged exchange-traded fund that invests in a basket of Japanese stocks. iShares MSCI Japan ETF (EWJ) is an exchange-traded fund tracking the performance of the Japanese market, as measured by the MSCI Japan Index.
Now that the Bank of Japan has embarked on its own version of "quantitative easing," recently instituting negative interest rates, Kotok believes that's extremely bullish for Japanese markets.
"We expect the entire array of debt instruments issued by the government of Japan to transact at an eventual interest rate of zero or lower.
"Thus, Japan can finance itself with the assistance of its central bank at no interest cost and without reasonable limits," he wrote last Thursday in a note to clients.
"Deficits don't matter; interest rates don't matter; and the capacity to finance is without limits until some market reaction occurs to alter this mix," he added.
Kotok says the Bank of Japan will itself start buying stocks and a basket of real estate investment trusts (REITs), in addition to various debt instruments.
"It is still difficult to assess the effects of these extraordinary Japanese measures, coupled with equally remarkable negative-interest-rate policy measures being implemented in Europe, on interest rates and inflation pressures in other mature and maturing economies around the world," he adds.
However, "we now have a situation where one-fourth of global GDP is produced in 23 countries that are trading with a negative-interest-rate policy."
Meanwhile, back in the U.S., "there's no way the Fed makes four rate hikes this year," Kotok adds.
For U.S. stock portfolios Kotok likes utility ETFs such as XLU, the Utilities Select Sector SPDR Fund.
XLU tracks the performance of the Utilities Select Sector Index, which includes communication services, electrical power providers, and natural gas distributors.
215-854-2808@erinarvedlund