{"id":8205,"date":"2019-09-03T20:30:07","date_gmt":"2019-09-03T20:30:07","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8205"},"modified":"2022-02-26T13:07:13","modified_gmt":"2022-02-26T13:07:13","slug":"recession-risk-factors-no-one-is-talking-about","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/recession-risk-factors-no-one-is-talking-about\/","title":{"rendered":"Recession Risk Factors No One is Talking About"},"content":{"rendered":"\n<p>Most reporting I\u2019ve seen on the risk of economic recession\nand market volatility continues to focus on U.S.-China trade relations, which I\nwould agree is a big deal. But here\u2019s what I also believe: <em>Investors should assume that known risks are already reflected in stock\nprices<\/em>. <\/p>\n\n\n\n<p>If we really want to identify a trigger for the next\nrecession\/bear market, I think we need to look for underappreciated risks that no\none is talking about. So, while the U.S.-China trade dispute concerns me, I\nwould today classify it as a known risk with fairly weak pricing power. <\/p>\n\n\n\n<p>Below, I\u2019ll give three examples of underappreciated risks\nthat we believe investors should keep an eye on when trying to identify factors\nthat could end the cycle. This is not to say that any of these three risks will\nimminently end the expansion \u2013 it is more of an effort to guide investors for\nhow to potentially identify risks that no one is talking about. <\/p>\n\n\n\n<p><strong><sup>______________________________________________________________________________________________ <\/sup><\/strong><\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_9_2&amp;content=stock_market_outlook_report \">Could These Risks Lead to a Recession? Or More Volatility?<\/a><\/strong><\/p>\n\n\n\n<p>Are you prepared for the\npossibility of volatility or a recession? In my view, it is essential not to\nlet your emotions get the best of you and instead to keep an eye on these\nrisks, key economic indicators and hard data. To help you do this, we are\noffering all readers a first-look into&nbsp;<strong>our just-released August 2019\nStock Market Outlook report.<\/strong><br>\n&nbsp;<br>\nThis report will provide you with our forecasts along with additional factors\nto consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>For how long will 2019 stay bullish?<\/em><\/li><li><em>Zacks global markets\u2019 outlook<\/em><\/li><li><em>What sectors show the best opportunity?<\/em><\/li><li><em>What industries within those sectors most merit your\n     attention?<\/em><\/li><li><em>Forecast for the S&amp;P<\/em><\/li><li><em>Small-cap vs. large-cap returns<\/em><\/li><li><em>And much more.<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br> \u00a0<br><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_9_2&amp;content=stock_market_outlook_report \"> <\/a><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_9_2&amp;content=stock_market_outlook_report \">IT&#8217;S FREE. Download the Just-Released August 2019 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_9_2&amp;content=stock_market_outlook_report \">1<\/a><\/sup><\/strong><\/p>\n\n\n\n<p><strong><sup>______________________________________________________________________________________________<\/sup><\/strong><\/p>\n\n\n\n<p><strong>Risk #1:\nConcentration of Power and the Risk of Regulation<\/strong><\/p>\n\n\n\n<p>One risk I\u2019m watching more closely is the concentration of\npower \u2013 and market capitalization \u2013 in just a handful of technology names.\nWithin the technology sector alone, Microsoft, Apple, Google, Amazon, and\nFacebook comprise <em>about 50% of the entire\nsector\u2019s market capitalization. <\/em>Those five companies also make up about a\nquarter of the entire U.S. stock market.<sup>2<\/sup><\/p>\n\n\n\n<p>The last time that technology companies held so much clout\nin the stock market was, you guessed it, during the tech bubble in 2000. Back\nthen, technology companies made up about one-third of the entire U.S. stock\nmarket, and most readers can remember what happened when investors bid-up\nvaluations far too high. <\/p>\n\n\n\n<p>In the current cycle, I would argue that the problem isn\u2019t\nthat valuations are too high or that the biggest technology companies do not have\nstable, solid earnings \u2013 they are very profitable enterprises and investors can\nmake a good case to pay-up for future earnings. <\/p>\n\n\n\n<p>I would argue, however, that with so much market share\nconcentrated in the hands of just five companies<em>, the risk of regulation<\/em> looms larger and has potentially bigger\nconsequences on earnings than most market observers are acknowledging.&nbsp; <\/p>\n\n\n\n<p>To date, making the case for more regulation on technology\nhas been difficult. Many of the biggest technology companies either offer free\nservices or are selling goods whose prices remain competitive. Old antitrust\nlaws focused on preventing companies from growing so big that they could\ncontrol pricing power and remove competition. Today, even as technology\ncompanies have gotten bigger, the hardware, software, and services have gotten\nbetter, and no one is complaining about price. <\/p>\n\n\n\n<p>But even as consumers enjoy free services and improving\nproducts, there has been growing skepticism about other ways tech companies\nmake money: by collecting data on your daily activity, interests, and even\nmovements. In the modern economy, data is currency, and technology companies\nhave scores of it (often unbeknownst to the consumer). <\/p>\n\n\n\n<p>Regulation seems inevitable, and it\u2019s actually one of those\nrare areas in politics with bi-partisan support. Overseas, Europe has already\ntaken formidable regulatory action with the enactment of the\nGeneral Data Protection Regulation, or GDPR.&nbsp;GDPR\ncovers everything from giving users much more control over their personal data,\nto setting standards for how corporations can collect and use user data, to\nsetting fines for tech companies in violation of the laws (already in the\nhundreds of millions). It may also provide a template for future U.S. law.<\/p>\n\n\n\n<p><strong>Risk\n#2: Sustained Weakness in the Cass Freight Shipments Index<\/strong><\/p>\n\n\n\n<p>The Cass Freight Shipments Index<sup>3<\/sup>\nis one of those little known leading indicators that has historically been pretty\ngood at predicting economic contractions. After all, tracking how much freight\nis moving across the country and across the world should offer good insight\ninto demand trends across the global economy. <\/p>\n\n\n\n<p>In December 2018, the index turned\nnegative for the first time in 24 months, and has posted negative readings in\nevery month since. At issue, too, is that the negative readings are fairly\nsizable: -6.0% in May, -5.3% in June, -5.9% in July.<sup>4<\/sup> The last time\nthe Cass Freight Shipments Index had sustained negative readings was in 2015,\nwhich many readers may remember was a flat year for the S&amp;P 500.<sup>5<\/sup>\nShipments rebounded in 2016 (as did the stock market), but with the economy\ncurrently mired in a trade war during an economic cycle that is arguable\nstretched, it will be important to watch how shipments shape up in the back\nhalf of the year. <\/p>\n\n\n\n<p><strong>Risk #3: Risky\nMortgages are Back in Large Numbers<\/strong><\/p>\n\n\n\n<p>The abundance of subprime mortgages and their inclusion into\nrisky derivative products were at the root of the 2008 Financial Crisis. In\nshort, banks were taking excess risk on borrowers with low income and poor\ncredit, then hedging their risk through derivative collateralized debt\nobligations. <\/p>\n\n\n\n<p>The subprime loans of 2007 are now referred to as \u201cnon-qualified\u201d\nor non-QM loans, but they are just as abundant \u2013 and growing. Borrowers took\nout $45 billion in non-QM loans in 2018, which is the highest number seen since\njust before the crisis in 2008. The numbers are growing. In Q1 2019, $2.5\nbillion worth of non-QM loans were issued, which is more than double the figure\nfor Q1 2018 and marks the highest level of issuance since the end of 2007.<sup>6<\/sup>\nTo be fair, the biggest banks are shunning most of this loan business, leaving\nit to non-bank lenders. But this is still a trend worth watching.<\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>As of now, the trade war with China has no end in sight, but\nit\u2019s been so widely disseminated at this stage that I believe the risk is\npriced into asset prices. The three examples detailed above should give\ninvestors a better idea of the types of risks that you should be looking for:\nlittle known, little discussed factors that could do harm to the broad economy\nif they got materially worse. These are the types of risks to keep a closer eye\non. <\/p>\n\n\n\n<p>To help you keep a close eye on these risks and other economic indicators like inflation, trade and the yield curve, I am offering all readers our just-released <strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_9_2&amp;content=stock_market_outlook_report \">August 2019 Stock Market Outlook report.<\/a><\/strong><\/p>\n\n\n\n<p>This report will provide you with our forecasts along with\nadditional factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Why are Zacks strategists (including me) staying\nbullish?<\/li><li>Stock market returns expectations for 2019<\/li><li>Can a U.S. stock market bounce back this fall?<\/li><li>Stock market returns expectations<\/li><li>What of U.S. GDP Growth?<\/li><li>Returns for Small, Mid, and Large Cap stocks<\/li><li>And much more.<\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<strong><sup>7<\/sup><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Beyond the China trade dispute, other risks could tip economy into recession <\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-8205","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8205","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=8205"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8205\/revisions"}],"predecessor-version":[{"id":10719,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8205\/revisions\/10719"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8205"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8205"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8205"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}