I have suggested on a number of occasions recently, that we felt a US recession was an increasing probability and although economic data from the beginning of the 2nd quarter is coming in at levels that are better than expected, this is only adding to that probability.
Let me explain:
As the US Federal Reserve sees their mandates of full employment and price stability (inflation target of 2%) being realized and expectations of 2nd quarter growth now close to 3%, they have little, if any official justification for holding off on raising interest rates.
When they raise interest rates, they will be raising the cost of servicing debt, debt levels that have been growing on a global scale:
and...despite all the talk of de-leveraging in the post 2008-2009 economy, US debt levels are fast approaching 2007 levels:
Auto loans and student loans have been leading the way.
The impact on the economy of a December rate hike saw US growth in Q1 2016 decline significantly. The consumer (2/3 of the economy) was "hunkered down". As the storm passed, the consumer has re-appeared, but they are funding purchases (of autos and restaurant outings) with debt that is vulnerable to increased costs of servicing when interest rates rise.
If and when unemployment levels rise because corporations continue to be unable to generate profit growth (and they are forced to cut expenses), this will exacerbate the problem (as I have also suggested, recently:
When unemployment levels rise and intersect with their 36 month (3 year) moving averages, it has signalled recession in the past 3 out of 3 times.
Rising debt costs and higher unemployment do not make for economic strength and more importantly, do not make a good case for stocks that at the moment are already over-priced.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist