Tea leaves predicting little chance of recession

by | Nov 11, 2019

“I don’t look to jump over 7-foot bars.  I look for 1-foot bars that I can step over.”

– Warren Buffet

With most of the economic tea leaves predicting little chance of an oncoming recession there are few reasons the equity market should not continue higher. 

New highs seem to be a concern for many of the less informed but consider the number of new highs the market has achieved over its history.  Market acrophobia seems to be a real disorder.  Of course, the path to higher highs is not predictable or linear.  Retractions are inevitable, but as long our economy has growth in labor and productivity, market prices will reflect the same trajectory.

“Buying the dip” strategy has been and should continue to be an effective way to gain new or increased exposure to equity markets.  Why? Inflation remains contained, which should keep the Fed in a more accommodative mood.  The PCE index (Fed favorite) has year over year core inflation at 1.7%.  This is well below the targeted rate of 2%.  The job market remains tight with U-4 predicted at 3.7% in 2019 and 3.8% in 2020, yet wages are showing only modest increases.  Even the broadest measure of unemployment U-6 is now at 6.9%, the lowest in almost 20 years. 

With the Fed supplying liquidity and consumers getting paychecks, our economy driven predominantly by consumer actions should grow.  Manufacturing has suffered a slowdown but even now this looks to be on better footing. 

But forecasting matters of the economy will never be so simple.  Potholes in the road to accuracy are numerous.  Trade talks, out-sized inflation, slowing consumer spending, or the bursting of a now unidentified asset bubble could change the narrative.  For now, stay invested, stay diversified, and stay disciplined.  In markets, what goes up does not have to come down.

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