—Scott Minerd, Global CIO; Brian Smedley, Head of Macroeconomic and Investment Research; Matt Bush, Director
- Our Recession Probability Model rose across all horizons in the first quarter of 2019. While near-term recession probability is limited, the probability of a recession occurring over the next 24 months has more than doubled.
- The deterioration in leading indicators, inversion of the yield curve, and tightening of monetary policy all contribute to rising recession risks. As we expect these trends to continue in 2019, we should see recession risk rise throughout the year.
- We maintain our view that the recession could begin as early as the first half of 2020, but will be watching for signs that the dovish pivot by the Federal Reserve (Fed) could extend the cycle.
- The next recession will not be as severe as the last one, but it could be more prolonged than usual because policymakers at home and abroad have limited tools to fight the downturn.
- Credit markets are likely to be hit harder than usual in the recession. This stems from the record high ratio of corporate debt to GDP and the likelihood of a massive fallen angel wave.
- When recessions hit, the magnitude of the associated bear market in stocks is driven by how high valuations were in the preceding bull market. Given that valuations reached elevated levels in this cycle, we expect a severe bear market of 40–50 percent in the next recession.
Recession fears resurfaced at the end of 2018 as a combination of negative data surprises, communication blunders by the Fed, slowing growth overseas, and rising trade tensions triggered a selloff in risk assets that led many in the market to fear a recession was imminent. While more dovish Fed communication and the recent market rebound have helped allay these fears, many are still left wondering if a recession is around the next corner. We don’t think so. Our recession forecasting tools continue to point to the same timing as they have over the past year and a half: recession risk in the near term is moderate, but the next recession could begin as early as the first half of 2020.
Scott Minerd discusses his economic outlook and the possibility of a financial accident in 2019.
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