Signs point to U. S. recession: economist
It may be talked about in reference to Europe, emerging markets and more recently, Canada, but there is a growing concern the U. S. economy might be facing a recession, and that means low returns on risk assets.
Low unemployment, rising compensation growth, reduced profit margins and elevated investment in durables have historically been useful predictors of upcoming recessions, J. P. Morgan economist Jesse Edgerton notes in a new report.
Based on the current levels of those variables, he thinks the chance of a recession within two years is as high as 40 per cent, rising to 66 per cent within three years.
Edgerton found that when the U. S. unemployment rate was high ( above seven per cent), the odds of a recession starting within a few years were low. But when unemployment was four per cent or less, the next recession began within two years more than half the time. The current unemployment rate is 5.1 per cent.
J. P. Morgan’s weak outlook partly explains its low expectations for equities — only about a four per cent rise in the next 12 months.
As a result, Edgerton suggested an investor with a typical 60/ 40 portfolio split between stocks and bonds should currently hold 25 per cent stocks and 75 per cent bonds.
Pierre Lapointe, head of strategy at Pavilion Global Markets, said investors should prepare for more disappointment.
“With several stock markets displaying high P/ Es, low EPS growth and most bonds yielding negative real yields, the recent pop in global volatility brings us to reconsider both stock and bond markets,” Lapointe says in a report.