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Recession Watch - Continued Commentary

August 09, 2019
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Current unemployment numbers and 2nd Quarter 2019 U.S. economic growth (GDP)

(This commentary is not an advertisement to sell 'free lunch' high fee / high commission annuity and insurance products, or other unsuitable investments. Michael R. Bacci, CFP has been providing experienced portfolio management for over 20 years, and practices professional fiduciary based investment management.If you are uncertain if you can tolerate the risk to your portfolio which a recession can bring.... don't wait to get our experienced professional opinion.)

Summary Introduction:

In my previous commentary from July 15th, I detailed current pressures on the economy and investment markets, and that the potential for a large economic slowdown or recession within the next 3 to 9 months is elevating. Investors, especially those getting ready to retire or are already in retirement should be seeking expert advice as to what this could mean for their investments and overall retirement strategy. Just sitting back with the mantra “it’s for the long term” at this late stage in this stock market and economic cycle (and with data currently flashing many red flags) may be very disruptive and possibly destructive to your retirement plan, hopes, and dreams.

'Super cycles' of stock and real estate market growth of the past 20 years have ended in severely destructive ways, and have in many cases derailed pre-retirement and post retirement plans. The end of the last super-cycle... ‘The Housing Boom To Bust’... which lead the Great Recession, forced many who had planned to retire to keep working, and forced many who were already retired to go back to work. Even those with higher levels of wealth (and already in retirement) were forced to alter retirement plans due to low returns on conservative fixed income investments (due to very low interest rates) along with great uncertainty around their growth investments (stocks and real estate).

Please remember, the end of the last two super growth cycles of the last 20 years ended with the S&P 500 stock index down more than 50%, and took between 5 and 7 years to recover. In other words, an end to a super cycle can wipe out years of portfolio gains in a relativley short period of time and may take years to earn back.

The stock markets have historically telegraphed an upcoming economic slowdown (if not recession) before it has taken hold. We have had 4 corrections (a drop of values by more than 10%) in the S&P 500 during the past 18 months. Although not a guarantee, market technicians may tell you that this is an ominous sign for future economic and stock market stability.

(Please read further for updated details of specific factors currently affecting economic and market conditions, and how current headlines regarding U.S. Gross Domestic Product and Unemployment numbers are very misleading.)

Deceptive Economic Headlines:

The headlines being portrayed in recent news releases continue to detail an economy of great strength. This is just not the case. Most metrics which assess the strength of various U.S. business sectors have been eroding over the past 15 months, and this erosion has been accelerating over the past 4 months. Yes, unemployment is still at very low levels. But strong unemployment readings are typically one of the last things to deteriorate when entering economic downturn and possible recession. What the employment headline numbers don’t tell you is that the amount of forecasted 'new to be hired' employees is decreasing and that companies are in the process of changing their behavior for the future to one of protectionism. This behavior means there is a much higher likelihood of a slowing in hiring, and a much higher potential of people being laid off in various industries over the coming 12 months. Headline employment numbers are backward looking. They don’t tell you where we are going.

As of 8/1/19, the China Trade War has now entered a new phase. President Trump has now added tariff taxes to the remaining $300 billion of goods coming to the U.S. from China. China will most likely respond with a new level of trade war tariffs and sanctions of their own against the U.S.. It is widely felt that the new tariffs on China compound the already existing economic distress against US corporations which may already be struggling, and may spread distress to those who were previously thought to be strong. Many economists who remain ‘on the fence’ regarding the direction of US economic weakness have stated time and again that an acceleration in the China US Trade war (to now current levels) would push them into the camp of elevated concern, and that Recession may be more possible or imminent than previously thought. Many other leading economists continue to think that we are on the brink of recession, or that we are already in the beginning stages of a recession. The stock markets have historically experienced greatly heightened volatility and pronounced 'selling off' before an upcoming economic slowdown or recession has taken hold.

The current news headlines for the recent second quarter U.S. GDP (Gross Domestic Product) number were very misleading. Last Friday (7/26/19) we received a second quarter GDP number of 2.1%. This was better than the expected reading 2.0%. So most news headlines read, ‘U.S. GDP beats expectations’. What they didn’t tell you is that a large amount of spending (economic activity) in the second quarter of 2019 was from the US Government, and was a carry-over of the purchasing of goods and services as a result of the government shutdown in the first quarter 2019 (a very large amount of government spending/economic activity which will not repeat in coming quarters). In addition, the Gross Domestic Product (GDP) headline stated that the consumer was very strong in spending during the second quarter 2019. What they didn’t tell you is that the consumer is very stretched and that most spending is being done on credit cards, and that there was a large draw-down in consumer savings accounts as well.

If you remove from the second quarter GDP number amounts of economic activity which were due to the delay of first quarter US Government spending, and adjust for the excess amount of consumer credit card spending, it is most likely the case that the GDP number (economic growth in the US) was under 1% for second quarter 2019 (down from 3.1% in first quarter of 2019). Lastly, corporate spending has declined heavily, curtailing it's impact on economic growth in the U.S.. Corporations are reducing spending and investment activity because of great concern over where the economy is headed...especially with regards to the U.S. China trade war. So now we have an economy being fueled predominantly by credit cards and government spending.

Yes, the Fed lowered interest rates by .25% on July 31st. A Fed interest rate cut generally doesn’t have an economic growth impact for 12 to 18 months, and .25% cut generally doesn’t have an effect on the economy at all. In addition, a Federal Reserve cut in interest rates is really just an enticement to create more debt laden spending from consumers… who are already showing sings of being at their spending limit and are getting nervous about recession as well.

Please see my recent article dated 07/15/2019 in the ‘Commentary Archives' tab of this website where I detail (with supported links) how the end of the past two ‘super economic cycles’ have ended with stock market declines in excess of 50% (on average), and how it took approximately 7 years from the start of the 2000 'Technology Bust', and approximately 5 1/2 years from the Housing Bust to recover to previous peak S&P 500 stock market levels. Make no mistake, we are most likely in the late stages of the largest and longest of the ‘super economic cycles’ on record. This is primarily due to the lowest interest rates in history which have caused historic amounts of corporate and consumer debt, along with inflated stock and real estate prices.

At the very least, know your risk tolerance and assess what ‘long term’ investing means to you and your future needs from stock invested funds. In reality, the wait for a recovery after a potential recession has fully manifested may be much longer than you or your retirement plan may wish to undertake... and in some cases survive financially.

We at BACCI INVESTMENTS GROUP,  INC. can help. Please call to setup a no cost consultation with Michael R. Bacci, CFP at 928-445-2598.

Disclosure: The content of this article is solely the work and opinion of Michael R. Bacci, CFP and does not represent in any way the views of Royal Alliance Associates, Inc. or any of its affiliated companies.

Any mention of past market or investment performance is not a guarantee of future performance. This commentary is an opinion and in no way offers a guarantee that economic or market events will transpire in fashion discussed.

Stay tuned to our website for commentary updates as we help clients navigate the waters of economic and market uncertainty.