by Kevin McCreadie, CEO, CIO, AGF Management Ltd.
Itâs been one year since U.S. recession fears took their first good hold with investors and sent stock markets into a nose dive through the final weeks of 2018, but not much has changed in the intervening months.
Yes, the S&P 500 Index has rebounded and is back in range of all-time highs again, but 10-year U.S. Treasury yields have also fallen as low as theyâve ever been at times this year and the never-ending trade battle between the U.S. and China continues to hang over the global economy.
If anything, the economic backdrop has gotten even muddier in recent weeks, making it increasingly difficult to determine just how worried all of us should be at this point in the cycle.
Consider Septemberâs U.S. jobs numbers. The unemployment rate fell to 3.5% from 3.7% last month, marking its lowest level in 50 years, according to the U.S. Bureau of Labor Statistics. While jobs data is typically considered a lagging economic indicator, the numbers, which included a decrease of 275,000 in the number of unemployed, gave equity prices a temporary boost when they were released and suggests the U.S. economy still has life to it.
The same, however, canât be said of the most recent Purchasing Managers Index (PMI) survey, which showed the U.S. manufacturing sector falling deeper into contraction. Since November, the countryâs PMI score has fallen from a high near 59.3, representing strong expansion, to 47.8 in September, according to the Institute of Supply Management (ISM).
Source: Institute of Supply Management (ISM). Purchaser Managers Index surveys are completed monthly with a score of 50 or greater representing a manufacturing sector expansion and a score below 50 representing a contraction.
The most recent data has likely been distorted by a number of factors including the General Motors strike, which forced the automaker to stockpile inventory in advance, and the grounding of Boeing 737 Max planes that has resulted in a significant reduction to shipments at least until the first quarter of next year, the company says.
At the same time, itâs clear that the toxic global trade environment is taking a toll. In addition to the headline PMI numbers, the demand for trucking continues to fall and new export orders have fallen off a cliff, hitting their lowest level in several years, the ISM data shows.
Given all of these mixed signals, itâs no wonder that markets have been so volatileâespecially when considering that economic conditions are far worse in Europe where Brexit remains a major headwind and in other parts of the world.
Then again, what has transpired so far this year shouldnât come as a surprise. While itâs inevitable, predicting the exact timing of a recession is almost impossible and late cycle data has always tended to be convoluted much like it is today.
In recognizing that, investors who maintain a cautious stance may benefit more than those who are less risk averse. By holding a bit more cash in the portfolio, for instance, or hedging some equity risk with an allocation to alternative asset classes and/or strategies, there may be a better chance of protecting against potential downside, while still being able to participate in future upside.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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The commentaries contained herein are provided as a general source of information based on information available as of October 7, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
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This post was first published at the AGF Perspectives Blog.
