The Timing Of The Next Recession

If the Fed keeps raising rates in line with the “dots,” monetary policy will move into restrictive territory by early 2019. The good news is that today’s economic imbalances are not as formidable as those that existed in the lead-up to the past few recessions. The bad news is that cracks are starting to form – the U.S. commercial real estate sector warrants monitoring. Remain overweight global equities for now, but look to significantly pare back exposure next summer.

To access the full report entitled “The Timing Of The Next Recession”, please click here.

Populism Blues: How And Why Social Instability Is Coming To America

The U.S. is experiencing a surge in populism because of an intense disconnect between elites and the masses. Elites have captured American institutions, making compromise and reform unlikely without a shock to the system. President Donald Trump identified this crisis, but his policies – at this early stage – do not suggest he will alleviate the core problems of popular well-being. With a recession on the horizon in 2019, we expect socio-political instability to rise ahead of the 2020 election.

To access the full report entitled “Populism Blues: How And Why Social Instability Is Coming To America”, please click here.

Break Glass In Case Of Impeachment

Impeachment is a political, not legal, process in the U.S. political system. If Democrats take control of the House of Representatives in 2018, Trump will almost certainly be impeached. Otherwise, it would require “smoking gun” evidence of criminal behavior to turn House Republicans against the president. For now, financial markets will largely ignore impeachment risks and focus on tax cuts. Midterm elections will accelerate their tax-cutting attempts.

To access the full report entitled “Break Glass In Case Of Impeachment”, please click here.

High Speculation In U.S. Equities

While the BCA’s cyclical stance on U.S. equities remains positive, it is critical to be aware of the high degree of speculation.

BCA’s Equity Speculation Index (ESI) signals that the U.S. stock market’s advance is at a very high risk stage. That said, the ESI can stay in elevated territory for a prolonged period before a market decline unfolds, as it occurred in 2014/2015. The eventual weakness in equities in early 2016 turned out to be a mid-cycle correction. However, the elevated ESI readings in 2000 and 2007 flagged the deep bear markets.

Without a recession on the immediate horizon, given the still upward sloping yield curve, it is premature to expect a repeat of 2000 and 2007. However, a market correction cannot be ruled out. While BCA’s 9-12 month outlook for U.S. equities is positive, investors should maintain some non-cyclical exposure in the event of a short-term market pullback.

Has China’s Cyclical Recovery Peaked?

There is a rapidly emerging consensus that China’s growth peaked in the first quarter and the economy is facing growing downward pressure.

China’s latest PMI numbers released this week seemed to validate the increasingly consensus view of an imminent growth top. Most major components of the PMI surveys in both the manufacturing and service sectors had setbacks, which is also reflected in softer commodities prices.

Although tighter on the margin, Chinese monetary conditions remain fairly stimulative, which should continue to help the economy. The trade-weighted renminbi is still depreciating, albeit at a slower pace, and real interest rates deflated by PPI remain negative.

On the fiscal front, the government significantly reduced the fiscal stimulus toward the end of last year, but has since reversed course. Both direct fiscal spending and infrastructure investment have picked up notably, and the impact will continue to ripple through the broader economy.

In short, China’s policy settings remain expansionary. This is a major departure from previous years when the Chinese economy was under the heavy weight of policy tightening while external demand also weakened. Our China Investment Strategy team believes there is little chance that the Chinese authorities will commit a similar policy mistake that could lead to a major growth downturn.