Is a U.S. Recession Looming?
Advisors Asset Management
By Scott Colyer
July 10, 2012
In
the third quarter of 2011 the Economic Cycle Research Institute (ECRI)
called for a 100% chance of a U.S. recession. They have a stellar track
record of calling U.S. economic cycles. We noted this in our
communication to clients at the end of 2011 and again in the first
quarter of 2012. We gave the call credence because of who was making the
call. What we also noted is that the ECRI estimated the severity of any
slowdown to be shallow and fairly short-lived. Most recessions in the
U.S. are over even before they are positively identified. Other very
reliable indicators did not flash a U.S. recession and did not support
the ECRI assertion which included a very positively sloped U.S. yield
curve (still 100-110 basis points between the 30’s and 10’s).
The
ECRI is very well thought of as Morgan Stanley reversed their bullish
call on the U.S. equity markets back in August of 2011 based on the same
data. Months and months have gone by since these calls were made. It
now appears that we have a slowing economy based on the trajectory
change in job creation and other monitors. Europe woes are the blame of
the day. Is this the 2011 recession coming in 2012? I am not sure but I
doubt it makes much difference to us.
Normally, a slowing U.S. economy would prompt Central Banks to ease monetary policy. However, right now, not only the U.S. Federal Reserve (Fed) has the monetary policy pedal already to the metal. Likewise, the global economies are easing at record pace. The point here is the Fed, if faced with a recession, will certainly move to implement QE3. We believe this would be supportive of higher U.S. equity prices and lower bond yields. The bottom-line here is that whether we are seeing a recession or just a soft patch in the economy, our investment thesis remains the same. With monetary policy GLOBALLY being the easiest in history, we would expect future returns in the equity markets to be greater than high grade debt. Additional QE measures should goose hard asset prices and tend to weaken the dollar. Income assets will be what investors will seek as traditional assets have little yield. This situation will be supportive of the prices of income producing assets.
(c) Advisors Asset Management
