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NEW YORK (AP) – The US economy is sending worrying signals about the possibility of a recession, but the stock market has experienced a period of great concern to set records.
Which give?
In simple terms, while the stock market is watching the economy, the two are not always moving at the same pace. If investors find that companies continue to make profits and equities do not seem too expensive, they may invest, even if the economy has not been completely cleared by the eve of the recession.
This week, the S & P 500 and the Dow Jones Industrial Average returned to 1% of their record highs of July. One of the major reasons is the recent easing of tensions in the US-China trade war in anticipation of next month's negotiations, which could reduce the threat to US corporate profits. In addition, the Federal Reserve should again reduce its interest rates. Lower rates make bonds less attractive and may, in turn, encourage investors to invest more money.
Encouraging data on purchasing trends and the labor market also boosted investor sentiment.
Nevertheless, there is something to worry about. Investors know that tensions linked to the trade war can easily escalate into a new presidential storm, as they unfortunately saw last month when stocks fell by nearly 6%. Manufacturing is still weak worldwide. And the bond market sent a signal that was a pretty good predictor of recession in the past.
Wall Street is not exactly ignorant of these signals: analysts have launched a heated debate over whether a recession would end what has become the longest US economic expansion ever recorded.
But history shows that stocks can continue to rise until a few months before the official start of the recession, as it was until October 2007, two months before the Great Recession flooded the economy – and the stock market.
"The recession signals are still flashing yellow at this point," said Emily Roland, chief investment strategist at John Hancock Investment Management. In particular, she pointed out that three-month interest rates for Treasury bonds were still higher than those for 10-year Treasury bonds, a relatively rare event that preceded past recessions.
Roland often talks to financial advisors who manage money on behalf of clients, and advisors are generally optimistic about rising markets. Their clients, however, are usually much more negative.
The S & P 500 index funds yielded more than 20% this year, and the largest mutual fund bond yielded close to 8%. Yet many of these customers think they have lost money this year, Roland said.
Customers may be forgiven for the confusion, given the volatility of the market over the last year. After plunging nearly 20% by the end of 2018, the S & P 500 has had a record year for decades, but has had its ups and downs since May.
Economists generally predict slower growth, but few advocate for a total recession, which would be the first since the Great Recession of 2007-2009.
The continued growth of the labor market is encouraging for the economy. Employers continue to hire workers, although the pace has slowed and wages are rising. This means that more consumers have money to spend. The latest sign is that reported Friday by a report showing that US retail sales rose slightly last month, boosted by good sales of cars and SUVs.
But the trade war of President Donald Trump is obscure. It has already contributed to the first monthly contraction of manufacturing in the United States in three years. The greatest fear is that all trade-related uncertainties will encourage businesses and households to be more cautious and reduce their spending.
This could lead to lower corporate profits, triggering a slowdown in which companies would reduce their hires, leading to further spending cuts.
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