Stocks up, but worries remain
The U.S. economy is sending some worrying signals about a possible recession, yet the stock market has gone on a whatmeworry ride toward record heights. What gives?
Put simply, while the stock market watches the economy, the two don’t always move in lockstep. If investors see that companies are still bringing in profits, and stocks don’t appear too expensive, they’ll risk an investment even if the economy hasn’t gotten an allclear on
the recession watch.
This week, the S&P 500 and Dow Jones Industrial Average climbed back to within 1 percent of their record highs set in July. A big reason is the recent easing of tensions in the U.S.China trade war ahead of talks scheduled for next month, potentially diminishing the threat to the profits of U.S. companies. In addition, the Federal Reserve is expected to again cut interest rates. Lower rates make bonds less attractive investments and can, in turn, make investors more willing to sink their money into stocks.
Encouraging data on shopping trends and the job market also buoyed investors’ mood.
Still, there is plenty to be concerned about. Investors know tensions in the trade war can easily escalate up again with another presidential tweet storm, as they painfully saw last month when stocks tumbled nearly 6 percent. Manufacturing is still weak worldwide. And the bond market has sent a signal that has been a fairly good predictor of recessions in the past.
Wall Street isn’t exactly ignoring those signals — there’s a fierce debate among analysts over whether a recession is coming to end what’s become the longest U.S. economic expansion on record.
But history shows that stocks can keep rising until a few months before a recession officially starts, as they did until October 2007, two months before the Great Recession swamped the economy — and the stock market.
“The recessionary signals are still flashing yellow at this point,” said Emily Roland, cochief investment strategist at John Hancock Investment Management. She pointed in particular to how threemonth interest rates for Treasury bonds are still higher than for 10year Treasurys, a relatively rare occurrence that has preceded past recessions.
Economists generally are forecasting slower growth ahead, but few are calling for an outright recession, which would be the first since the 200709 Great Recession.