Features

Investors shouldn’t worry too much about a recession – here’s why

Fears of a downturn are playing on the minds of plenty of investors right now, says John Stepek. But they are getting ahead of themselves.

190408-Traders-634

There's still plenty to smile about

2019 Getty Images

The monthly US non-farm payrolls report is one of the most widely-watched data releases on the planet. It tells us how many new jobs were added in the US each month.

Technically, it's all the jobs except farmworkers (hence the name), but those account for such a tiny proportion of the modern workforce that it's not important.

Now, the payrolls report is pretty volatile. It's also subject to some very chunky revisions on a regular basis. So it's not very reliable, in reality. But markets pay a lot of attention to it nevertheless.

And there's one very good reason for that.

A near-perfect jobs report

In short, if the American consumer is in good health, then it's good news for the global economy. It means that at least one of the key engines of global growth is ticking over nicely.

That matters right now, because we're in another of those "are-they-aren't-they" periods where no one seems to know if we're slowing down or about to rally or about to go into a recession.

The International Monetary Fund (IMF) has just warned that it's about to cut its expectations for global growth this year. No one ever got rich by following the IMF's forecasts, but the ensuing headlines do speak to the overall tone of concern among economists and pundits right now.

So, after the long preamble what did the latest payrolls data say? Arguably, it was pretty much perfect.

The US added nearly 200,000 jobs in March. The result of 196,000 was a bit better than expected. Meanwhile, wages rose at an annual rate of 3.2%, which a bit lower than expected.

That's a good result, and I'll explain why. Firstly, it was better than feared, but not so strong that the Federal Reserve might start to wonder if it's right to end quantitative tightening (QT) as quickly as it plans to.

Secondly, wages rising at above 3% a year means that American consumers are getting pay rises in real terms (ie, after inflation). But at the same time, they didn't rise as sharply as expected. Again, that's good news for keeping the Fed from doing anything.

What's particularly key about the Fed here is that with markets now expecting rates to be flat or even to fall, that has a beneficial impact on one interest rate which is key to US consumer enthusiasm: the cost of a mortgage.

Last year, as the Fed was hiking rates, the US housing market began to slow down. But the 30-year mortgage rate has now fallen from a peak of around 5% late last year, to closer to 4.1% now. Not only will that encourage more buyers, it also means that existing buyers can cut their costs by remortgaging.

Given all this, you can start to see why despite all the jitters investors have driven the US market, the S&P 500, back to close to the highs of last autumn.

Meanwhile, the yield curve which briefly inverted has now un-inverted itself. The longer it stays that way, the easier it'll be for investors to write it off as a false alarm.

Markets are already way ahead of the economists

In October, markets began pricing in what might happen if the Fed decided that it was going to carry on raising interest rates regardless of what the economic indicators were saying, or what Donald Trump was telling them to do. That's why we got the slide in share prices, and the burst of panic.

Now of course, you have the economists and the think tanks all catching up and reporting on what the current data is telling them that the global economy has slowed down a bit and that the synchronised growth explosion that they were all in raptures about not that long ago, has in fact failed to emerge.

But markets are, again, looking ahead. In October, most central banks around the world were still in neutral-to-hawkish mode. Now they are firmly in dovish mode. In other words, they've gone from looking at raising rates, to holding or even cutting them in the near future.

Make no mistake, that has a massive effect. I am still reading people (usually economists) talking about central banks being out of ammunition, or being too close to the "zero-bound" to do anything. This is unalloyed guff. There is always stuff for central banks to do.

Let me be very clear: I don't think it's healthy for an economy to be reliant on non-stop central bank intervention. But the idea that central banks can run out of gimmicks to keep markets going up, when they literally have a printing press which they can use to buy whatever assets they like with impunity, is simply wrong.

So right now, markets are pricing in the fact that central banks are back on their side again. And that looks likely to continue for most of this year.

Does any of this make a huge difference to your investment strategy? It shouldn't. Your long-term investment plan shouldn't really be based around second-guessing central bank activity or the frequency of recessions.

But it's just useful to keep this stuff in mind when the headlines are constantly shrieking at you to "do something" about whatever the latest bee in their bonnet is.

Recommended

Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again
Tech stocks

Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again

As tech stocks continued to slide, there is a view that you can escape all the carnage by holding really high quality profitable stocks. That view is …
24 Jan 2022
Which assets will benefit as the “jam tomorrow” bubble pops?
Investment strategy

Which assets will benefit as the “jam tomorrow” bubble pops?

With tech stocks, cryptocurrencies and many other “long duration” investments crashing hard, the “jam tomorrow” bubble looks to be bursting. John Step…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022