In the last few months we have heard the rhetoric around a possible U.S. recession. According to global economists, the likelihood of a U.S. recession is 20%. Last year the probability was 12%.While much of the global economy has experienced a recession in the past few years the U.S. has been able to avoid it with unprecedented monetary policy and 7 years of zero percent interest rates. The Fed hiked rates in December of 2015 and seems determined to hike a few times in 2016 leaving many to express their opposing opinions. Often citing the slowdown in the economy.
It's important to remember recessions are part of economic cycles and sometimes by the time a recession is officially announced, it is already nearing it's end. The length of the typical recession has been declining over time. From 1854 to 1945, the average recession lasted 18 to 22 months compared to less than 12 months from 1945 to 2009. A large reason why this decrease has occurred is the willingness for central banks to intervene.
While we are not predicting a recession, we are also saying the indicators are there and we would not be surprised if we are in a small one right now. In fact, if we HAD to predict one way or the other we would probably say we are in a mild recession but we don't think it will be one that leads to massive layoffs and loss of jobs. The energy industry, however, has already seen a loss of jobs with more probably occurring this year. It may even be that this recession was lead by the decline in the energy sector.
So what does this mean for the markets? Probably more ups and downs, unfortunately. Despite the run up over the second half of February we just do not see anything that has fundamentally changed to explain the market having another slight rebound. We think more trouble is ahead over the short term. The important thing however is we are much more optimistic over the next 18 months to 3 years.
UPDATE: After posting this some better economic signs have come out. Goes to show why you cannot try to time investing based on news and numbers.