Posted on 01/28/2016 4:43:53 AM PST by expat_panama
Big stock market declines are often lead indicators for recession, and global markets are heading into their last week of trading for the month with the risk of seeing one of their biggest ever January declines.
Despite a big bounce in markets Friday, which saw the S&P 500 rise two per cent, fear is in the air. Bank of America Merrill Lynch economists said in an update Friday that they now see a 20 per cent chance that the U.S. economy will slip into a recession this year, up from the 15 per cent chance they predicted in December.
The rising chance of recession is due to three indicators that have turned negative in recent months: Industrial production, corporate profits and the U.S. stock market are all sharply down, and in past decades, a uniform drop among all three have tended to signal economic contraction.
Profit margins have been edging down since 2014, weighed down by major declines among the oil companies. Industrial production has fallen in 10 of the past 12 months. The S&P 500, meanwhile, is off seven per cent for the month, even with the strong bounce Friday. It is currently on track for its second-worst performance in the past 40 years, with only the 8.6 per cent decline in 2009 being worse, notes Doug Porter, chief economist at BMO Capital Markets. He also notes that the third-worst decline (6.9 per cent) was seen in 1990, also a recession year.
To add to concerns, spreads have widened considerably in credit markets, which usually themselves are lead indicators of recession.
For the moment, economists note that even as chances of a recession have grown, it is certainly not the "base case."Â Nevertheless, global markets are in selloff mode as investors have begun to price in the heightened risks.
"Markets are resetting valuations amid a less generous Fed and a continuing cooling in the medium-term global growth outlook (centred around China in particular),"Â Porter said. "And that reset process is sometimes going to be messy and volatile, not just for equities and commodities, but also for yields and currencies."
It has certainly been a brutal reset. Global stock markets have seen nearly US$8 trillion of wealth wiped out this month alone, while investors last week poured more into government bonds -- a traditional safe haven investment -- than at any time in the past year.
What is also spooking investors is the fact that if the U.S does slip into recession again, the Fed is very limited in what it can do to help the economy. Policymakers have already ballooned the central bank's balance sheet with a trillion dollar quantitative easing program and interest rates continue to remain near record lows, even following a 25-basis-point rate hike in December.
"We cannot rule out a recession in the next year,"Â said Bank of America Merril Lynch economists Ethan Harris and Emanuella Enenajor in a note to clients. "Accidents will happen, and we are concerned about the lack of policy ammunition to deal with a major shock."
Recession fears have markets now betting that the Fed will not move as quickly on interest rates as was projected last year. While economists had expected as many as four quarter-point rate hikes this year, futures markets are now betting that chairwoman Janet Yellen will only hike once in 2016, and not until the second half of the year.
If there's any good news to take away from the current environment, it's that the sharp decline in oil prices could stoke growth further down the road says Robert Kavcic, senior economist at BMO Capital Markets.
"A supply-driven plunge in oil prices, while causing an immediate cutback in related capex, will ultimately drive higher output and employment in the U.S., while leaving interest rates lower and non-energy corporate profits higher than they otherwise would be,"Â he said.
If that does play out, it could spell a bounce back for global markets and the U.S. economy.
"The sudden nature of the drop in oil prices is rightfully causing a tremendous shake-up in financial markets as investors calibrate to a new macro environment, but the U.S. economy, U.S. equities and, dare we say, non-energy Canadian equities should come out clean on the other side,"Â he said.
I visited a company yesterday that has been fattened by the fracking boom. the machines were idle and there was a gloomy feeling about the place
they just didn’t have any orders to keep the lines running.
A major recession will throw a wrench in the demodogs raise taxes platform
And it's not ending. It seems that now cities are doing massive construction endeavors to attract business, tourists/conventions, and high-income housing. That bubble has to burst.
With the disappearing middle class, the problem is that US citizens are in an even deeper hole. How many people could save for their future needs, even if they wanted to? That requires a stable job and an income that keeps up with expenses.
I'm wondering how much disposable income has disappeared in the US.
I'm not atypical. In my peer group (retires who have a responsible plan for future needs) everybody is cutting back where ever they can. Necessities keep taking more income...and lower gas prices don't mean much if you don't do much driving.
Does anyone have a plan to restore the middle class? Without that, it's hard to imagine that there's a solution.
Good morning all! It's a uniquely good morning for me because my slip-up yesterday turned out OK. What happened is that yesterday was actually an IBD 'follow-through' day and the contraction was over --we're now officially in a "confirmed uptrend". My missing the opportunity was the bad news. The good news is yesterday stocks plunged big time in rising volume --neat huh?
Futures traders are confused too, these traders happy and these scared. For stocks. For metals they're expecting another +0.66% with gold and silver up to new highs: $1,119.80 and $14.50!
Oh yeah, today's 'claims day':
8:30 AM Initial Claims
8:30 AM Continuing Claims
8:30 AM Durable Orders
8:30 AM Durable Goods -ex transportation
10:00 AM Pending Home Sales
10:30 AM Natural Gas Inventories
News: The Taxing Will Continue Until Morale Improves. I'm sure there's more but that's as far as I could get.
I turn 65 this year and am watching my business slip into serious trouble. I will need to find cash to keep it alive but can see no way to make a good result No profit and no cash for me. I am definitely becoming dispirited. This is the worst time of my life. All of this since the end of November.
Downturns happen. The big concern this time is that we're also seeing an extreme disconnect from reality with the people running things, leaders who just point to their imagined 5% unemployment and rampant inflation.
My brother and his wife are having to pull up stakes in south Louisiana’s oil country. He said things are going from bad to worse.
Fortunately, he landed a good job in Seattle. They’re hitting the road in two weeks.
My hope too. We may be wrong but we can still dream if we want anyway.
Whoa. Some serious agenda 21 stuff in Seattle these days. Let me know if they need help with suggestions for a home.
Recession? Try Depression.
Please. Do what ever you have to do enjoy life and be grateful for blessings you got. OK, that's big talk coming from me as someone who's finally on top of things; but 15 years ago when I got permanently kicked into an early retirement, had to move w/ a wife and 2 kids and build a new home and a new life. It all worked out (tho I didn't know at the time it would), the kids have all prospered and we're all grateful for the adventure.
The fact that things work out is just one reason to be happy. The other is that a negative outlook impairs judgment and I'm remembering it was a time when I needed all the good judgment I could get.
P!
Your post regarding retirement is valid. We have a large population who are unable to invest for retirement, but I also believe that a major stock market crash is coming that will wipe out much of what those who have invested expected to receive. I believe it will be so great a crash that it will throw the entire world into global economic chaos. Our government already has formulated plans to seize all IRAs, TSPs, and 401Ks. All they need is for the crisis to happen. They will us whatever money is left to shore up entitlement programs. Mark my words.
Or all the efforts to pump up the fake numbers are deflating, revealing the true bad situation never ended.
I think the Great Recession of 2007 never ended, as proven by decreasing workforce participation rates and stagnant/declining wages.
The “good” numbers were propped up by borrowed money and welfare transfers.
The recession never ended.
First clue was when the Party’s media crowed about how the recession ended just weeks after Obama was inaugurated.
No way can the change of leadership can make the economy turn around that fast. When Reagan took office, it took him years to turn around the Carter recession.
Any Freepmail info would be appreciated as my brother has never lived outside Texas or Louisiana. His wife is from Ontario, Canada. They’re venturing into uncharted waters (though his new employer did fly him in for a week to interview and to tour the area)
Thanks in advance!!
I was not aware we emerged from the last recession, I heard rumors we had but personally I have seen no evidence, I also heard there was zero inflation I’ve seen no evidence of that either, but what do I know; as the powers that be suggest I’m just to ignorant to understand that my wallet has not really getting thinner, to stupid to know it is more complicated than that, the thickness or lack thereof of my wallet has nothing to do with anything.
Expat, thanks for that advice. My job was oilfield related sales. I was in that business since the mid 90’s. Lost my job at the end of December. Working to move to another industry. I have jumped industries 3 times before and have always landed on my feet, but the process can be a grind. Have to keep my eye on the prize, but also take time to appreciate being off the rat wheel for a while.
I know a guy who runs a small construction co. He says he is hurting and had to lay off 2 of his 5 guys that work for him. Yet he has a lake house, a nice boat and he tells me his house is paid off.
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