With the current bull market reaching its 10-year anniversary this June, investors are beginning to question when the next recession will hit.
During the current bull market, there have been dozens of calls for stock market crashes from even very seasoned investors.
However one of these came true, and if you’d listened to these experts, you would have missed the subsequent upside, says Adriaan Pask, chief investment officer at PSG Wealth.
While it is difficult to accurately predict a bear market, one can still watch for signs and mitigate risk, said Pask.
To do this, PSG Wealth’s research team developed a proprietary South African bear market indicator. In 2018 it found that the risk for a US recession was moderately high. That risk has increased significantly, since.
“In the past few months, the US yield curve inverted on various occasions, but subsequently bounced back.
“On 19 July, the yields for 3-month (2.04%) and 10-year (2.05%) Treasury bonds finally rose after both inverted in May this year. This is an example of why it is so difficult to make accurate forecasts,” said Pask.
On Tuesday (1 October), a key US factory index fell to a 10-year low as businesses hold back investments amid tariffs and the US-China trade war, Bloomberg reported. And the ADP Research Institute on Wednesday showed hiring at US companies is cooling.
The current lack of inflation and inflation expectations in the US is one of the factors that supports a much longer economic cycle and less volatility, said Pask.
In the absence of inflationary pressure, monetary policy may remain much looser and reduce the risk of a recession and a bear market, he said.
“For us, the yield curve and output gap are particularly important to watch.
“While the output gap is not yet in high-risk territory according to our index, it is higher than last year. If the output gap continues to rise, it means that the potential for growth in the US economy cannot be sustained, which increases the risk of a possible recession and the probability of bubbles forming in certain sectors of the economy.”
“If inflation and wage growth remain contained at current levels, we believe the US economy could run for a bit longer. We do, however, believe it is in a late-cycle.”
If wages start to rise, combined with the low unemployment rate in the US, it could lead to higher inflation. An increase in inflation could signal the countdown to a US recession, warned Pask.
Reuters reported that investors will await Thursday’s ISM services report and Friday’s employment report to confirm or quash recession worries.
They will also be looking for evidence on the strength of the consumer, which has been a cornerstone of the current economic expansion, it said.
“I am more concerned at this point than I have been at any point in the entire year … The key ingredient is when the business recession impacts the consumer and we get a total recession,” said Phil Blancato, chief executive of Ladenburg Thalmann Asset Management in New York.
Looking at the local market, PSG Wealth’s bear market index is currently at an overall level of 32%, three percent higher than a year ago, and just above the safe zone of between 30% and 70%.
There is currently no real concern of a correction in our domestic market, said Pask. However, he warned that South Africa is at the mercy of developments in developed economies.
“Any recession, or major correction, in one or more developed economies, will likely dominate any of the positive factors in the South African economy, with the same effects on our equity market,” said Pask.
“Investors should remember that the rand’s weakness coincides with US stock market pullbacks. This is a crucial consideration for local investors who are concerned about elevated valuations of US stock markets.
“If US markets are to experience a pullback, it is likely that it will coincide with a weakening of the rand, which should offer some diversification properties for rand-denominated assets.”
The impact of developed economies South Africa is clear from the current rand exchange rate which weakened for a sixth consecutive day on Wednesday as emerging market currencies felt pressure from global risk-off sentiment.
PSG noted that investors also sought new catalysts from the ANC’s briefing on its plans to rescue the economy. The markets were again left disappointed on Wednesday after the ruling party promised much, but said very little on its plans to grow the economy.
The ANC approved a range of proposals to revive economic growth, but stopped short of endorsing Finance Minister Tito Mboweni’s controversial plan to sell some state assets, Bloomberg reported.
There was “broad consensus” among members of the ANC’s top decision-making body about the challenges the nation faces and that business and labor must play a greater role in fostering growth, secretary-general Ace Magashule told reporters in Johannesburg on Wednesday.
It was agreed the country needs to increase spending on infrastructure, produce more renewable energy and fix ailing state companies, he said.
“South Africa urgently needs to turn around its economic performance, as the rates of growth and investment are too low,” Magashule said. There is a “clear determination to act decisively and resolutely,” he said.
The rand gained as much as 0.7% against the dollar after Magashule’s comments, reversing an earlier decline of as much as 0.4%. It’s slumped 5.9% against the US currency so far this year, according to data compiled by Bloomberg.
“The speech made nice headlines but didn’t have any meat on the bones,” said Simon Harvey, a London-based foreign-exchange analyst at Monex Europe. “Actual details on the ANC’s plan are needed for a substantial rand rally.”
The rand looked to build on gains it made on Thursday, arresting a six day losing streak, trading at the following levels against the major currencies:
- Dollar/Rand: R15.17 (-0.80%)
- Pound/Rand: R18.64 (-0.88%)
- Euro/Rand: R16.61 (-0.88%)