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Goldilocks or the big bad recession?

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Insights and Market Perspectives

Goldilocks or the big bad recession?

Author: Kevin McCreadie

April 8, 2019

Equity markets have gotten a huge boost from the U.S. Federal Reserve’s (Fed) decision to stop raising interest rates for at least the rest of this year, but investors must not forget that weakening economic conditions are behind the central bank’s decision to pause.

While many believe we have entered a new “Goldilocks” period for stocks, the environment may not feel so right if the global economy continues to worsen and moves closer to recession in the weeks ahead.    

Nowhere is the prospect of a downturn more evident than it is in Europe right now. Germany, the European Union’s (E.U.) biggest economy, has seen a steep decline in industrial production and its manufacturing sector is now in contraction, prompting the country’s leading research institutes to downgrade their growth forecasts for Germany’s economy to 0.8% from 1.9% in the fall.

In part, Germany’s economic woes are self-inflicted and relate to its struggling automotive industry. However, China’s recent slowdown is also playing a role and, more importantly, so too is Britain’s tumultuous and yet unresolved plan to exit the E.U.  

Brexit has also taken a toll on both the French and United Kingdom’s economies and matters could get even worse in the case of a hard Brexit, whereby Britain leaves the E.U. without an agreement. Perhaps the best case scenario is a prolonged extension to the current departure deadline on April 12. But even then, it’s hard to see what would breathe much life into Europe’s economy at this late stage in the cycle. Unlike the Fed, the European Central Bank hasn’t been able to lift deposit rates out of negative territory to date and it has limited means of stimulus at its disposal.

Beyond the continent, cracks are also evident in the world’s two biggest economies. While the U.S. economy is supported by strong employment, low inflation – and now a Fed on hold – it can no longer rely on U.S. President Trump’s US$1.5 trillion in tax cuts and will continue to face trade headwinds as long as negotiations with China remain unresolved.  

The Chinese economy is also beholden to a resolution with its largest trading partner, but may be in better shape to right its recent slowdown. The country has initiated another massive stimulus program that is starting to pay off, according to a Bloomberg Economic gauge that shows rising confidence in the outlook from investors, small businesses and sales managers.         

To be clear, we still think all three of the world’s economic powerhouses can grow modestly and do not anticipate a global recession this year. But the fault lines that currently exist in Europe, China and the U.S. cannot be ignored by investors and given how strong equity markets have been of late, we’re most comfortable taking a cautious approach to stocks over the next few months. 

Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.


The commentaries contained herein are provided as a general source of information based on information available as of April 5, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

™ The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2023 AGF Management Limited. All rights reserved.

Written by

Kevin McCreadie

Kevin McCreadie, MBA, CFA®

CEO and Chief Investment Officer

AGF Management Ltd.

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