Do we repeat 2015-2016 in the economy and investment markets?


The big question for investors since the Federal Reserve started tightening money a few years ago is: will 2019-2020 be similar to 2015-2016, or will we sink into a recession?

In 2015, the US economy was so slow that several historically reliable indicators of an impending recession raised red flags. Industrial production was negative year over year and retail sales growth was down. The world economy was even weaker.

At the start of 2016, global stock markets were down sharply. Negative economic reports from China have caused panic sales. Interest rates have fallen sharply and warnings of deflation and depression have spread.

Global central banks have intervened with a coordinated increase in the global money supply. Markets and economy recovered without a recession in the United States

Last year has strong similarities, although it was not exactly the same.

The rate of economic growth has declined in the United States and the manufacturing sector is in recession. Growth is very slow outside the United States and still appears to be slowing down.

Corporate profits fell in 2015 and 2016 in what some have called an earnings recession. Likewise, corporate profits are on average lower than they were a year ago.

Several of the indicators of impending recession are now waving yellow or red flags. Industrial production was again very weak. The yield curve has inverted. Business investment remains very low.

Fortunately, the Fed stopped tightening the money supply at the end of 2018 and is now coordinating easy global monetary policy with other central banks.

There are signs that, as in 2015-16, the economy is stabilizing. There is a good chance that we will avoid a recession, but that is not a sure thing.

The service sector and households are doing well.

Household confidence is supported by rising house and equity prices and a strong labor market. In 2019, wage growth accelerated above the average for this economic recovery.

Still, the job market can’t get much better than it is, and wage growth appears to have peaked in early 2019. The good news when it comes to wages is that lower-paid workers have recently. experienced the highest wage growth. For much of the economic recovery, this group has been left behind.

Housing stagnated for most of 2019, but improved after interest rates fell in August.

However, housing today makes a minor contribution to overall economic growth. Stricter lending standards and a shortage of homes for sale mean that many people who want to buy homes are unable to do so. Home sales remain well below the pre-financial crisis average.

I continue to have two major concerns.

Business investment has declined and there are only a few signs that it could recover. Many companies say their investment plans are on hold due to uncertainty created by trade disputes, political divisions, slowing global growth and now the coronavirus. Economic growth is unlikely to continue if businesses do not invest to grow.

Profit margins are also of concern. Several factors have pushed margins to record highs over the past 20 years or so. Most of these factors fade away. The tight labor market is forcing companies to pay higher wages. Productivity is lower than it used to be. Globalization is on the decline. Big tech companies, which have the highest profit margins, are under attack by governments around the world.

These and other factors add to higher costs that companies cannot pass on through higher prices. Much of the stock price increases in recent years have been based on maintaining very high profit margins and earnings growth. If profit margins retreat to historically average levels, stock prices should correct themselves.

In Europe, there is a weak economy associated with deep political divisions which make it difficult to implement the necessary policies.

China’s growth was slowing before the effects of the coronavirus. Much of the reduction in growth was intentional, while part of it was due to trade disputes with the United States. Slower growth in the world’s second largest economy affects all other economies, and there is always a risk of policy mistakes that slow growth too much.

So far, the signs are that the US economy will avoid a recession and continue this long period of steady, modest growth. As in 2015-16, the Fed and other central banks appear to have recognized the red flags and reversed their policies quickly enough to avoid a reversal. The risks are not all behind us, and non-economic events like the coronavirus are able to stifle growth enough to push us into a recession. Right now, the data indicates that we are likely to repeat 2015-16 and postpone an economic downturn.


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