Late Cycle Lessons
Author: Kevin McCreadie
October 10, 2019
It’s been one year since U.S. recession fears took their first good hold with investors and sent stock markets into a nose dive through the final weeks of 2018, but not much has changed in the intervening months.
Yes, the S&P 500 Index has rebounded and is back in range of all-time highs again, but 10-year U.S. Treasury yields have also fallen as low as they’ve ever been at times this year and the never-ending trade battle between the U.S. and China continues to hang over the global economy.
If anything, the economic backdrop has gotten even muddier in recent weeks, making it increasingly difficult to determine just how worried all of us should be at this point in the cycle.
Consider September’s U.S. jobs numbers. The unemployment rate fell to 3.5% from 3.7% last month, marking its lowest level in 50 years, according to the U.S. Bureau of Labor Statistics. While jobs data is typically considered a lagging economic indicator, the numbers, which included a decrease of 275,000 in the number of unemployed, gave equity prices a temporary boost when they were released and suggests the U.S. economy still has life to it.
The same, however, can’t be said of the most recent Purchasing Managers Index (PMI) survey, which showed the U.S. manufacturing sector falling deeper into contraction. Since November, the country’s PMI score has fallen from a high near 59.3, representing strong expansion, to 47.8 in September, according to the Institute of Supply Management (ISM).
The most recent data has likely been distorted by a number of factors including the General Motors strike, which forced the automaker to stockpile inventory in advance, and the grounding of Boeing 737 Max planes that has resulted in a significant reduction to shipments at least until the first quarter of next year, the company says.
At the same time, it’s clear that the toxic global trade environment is taking a toll. In addition to the headline PMI numbers, the demand for trucking continues to fall and new export orders have fallen off a cliff, hitting their lowest level in several years, the ISM data shows.
Given all of these mixed signals, it’s no wonder that markets have been so volatile—especially when considering that economic conditions are far worse in Europe where Brexit remains a major headwind and in other parts of the world.
Then again, what has transpired so far this year shouldn’t come as a surprise. While it’s inevitable, predicting the exact timing of a recession is almost impossible and late cycle data has always tended to be convoluted much like it is today.
In recognizing that, investors who maintain a cautious stance may benefit more than those who are less risk averse. By holding a bit more cash in the portfolio, for instance, or hedging some equity risk with an allocation to alternative asset classes and/or strategies, there may be a better chance of protecting against potential downside, while still being able to participate in future upside.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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.
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© 2019 AGF Management Limited. All rights reserved.
Written by
Kevin McCreadie, CFA®, MBA
CEO and Chief Investment Officer
AGF Management Limited
