Time to worry about a recession

The Wall Street Journal

“If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm,” said Greg Ip. In other words, a lot like what the economy looks like today. Our 4.3 percent unemployment rate, the lowest in 16 years, “has more room to go up than down.” The economy’s expansion is heading into its ninth year and will be the longest on record in two more. Meanwhile, the Federal Reserve is steadily raising interest rates; a tightening of monetary policy “has preceded every recession.” Ironically, our preternaturally calm market is also a source of concern, suggesting that traders aren’t worried enough about

risks. “Implied volatility,” which measures the cost of hedging against market shocks with options, is the lowest it’s been since mid-2007, just before the financial crisis. None of this means a market meltdown is guaranteed, but businesses and investors are acting like steady growth and low interest rates will last forever. “Stocks are trading at a historically high 22 times the past year’s earnings,” with companies borrowing heavily to fund buybacks and dividends. Once prices start to fall, and credit dries up, those companies will feel the squeeze, making any correction much worse. “Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this.”