I do tend to go on about certain topics: and so it is with consumer, business and investor confidence because they are crucial to the ongoing growth of an economy.
Uncertainty tends to put decisions to spend and invest on hold: Post 2008 -2009 "great" recession, businesses (on the whole) have yet to commit to long-term investment strategies (preferring to spend $ on share buy-backs) and productivity has suffered to the detriment of economic growth.
In the US, however, consumer confidence had been growing until mid 2015, when it dipped, but yesterdays data pushed it back close to its 2015 highs. Should bode well for the US economy, right?
So I thought that I might go back and look at the historical relationship between US consumer confidence and US recessions:
And it appears that US consumers actually get a little "over" confident in the months preceding a recession (the blue periods).
So strong employment data give consumers confidence, but usually that is at the top of the cycle (and we know how everything economic cycles). Interestingly, that coincides with when the US Federal Reserve usually starts to raise interest rates, at the peak of the cycle (as we have pointed out on numerous occasions).
And as we have discussed regularly on our weekly webinar (http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html) the Fed's rate hikes will tend to flatten the yield curve, which then, in turn, signals a recession is not far behind.
Unintended consequences perhaps, but consequences nonetheless.
So the Fed is looking for a reason to normalize interest rates.
And they will certainly be analyzing the employment data to be released on Friday (because their decision making is "data driven"). If the data is strong, chances will grow that a rate increase may be announced at their September 21 FOMC meeting announcement.
So hold on to your hats, low volatility levels that we have seen in July and August may be subject to some spikes as market participants try to figure out the Fed's next move.
As always, we are very aware of the potential for volatility and have continued to immunize (as best as is possible) our and our client portfolios from this potential: staying away from over-priced assets and waiting for better values to purchase them.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist