{"id":8295,"date":"2019-10-21T19:40:54","date_gmt":"2019-10-21T19:40:54","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8295"},"modified":"2022-02-26T13:07:09","modified_gmt":"2022-02-26T13:07:09","slug":"are-investors-pricing-in-too-much-recession-risk","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/are-investors-pricing-in-too-much-recession-risk\/","title":{"rendered":"Are Investors Pricing in Too Much Recession Risk?"},"content":{"rendered":"\n<p>October kicked off with some weak economic reports. The\nInstitute for Supply Management released manufacturing data showing that U.S.\nfactory activity continued its slump, with the manufacturing index falling to\nits lowest level (47.8) since June 2009. Global manufacturing activity also\nremained firmly in negative territory in September, posting its fifth consecutive\nmonth of contraction. Nearly every major economy took a hit, the report said.<sup>1<\/sup><\/p>\n\n\n\n<p>Markets were rattled by this data, and recession chatter\nfollowed. <\/p>\n\n\n\n<p>I\u2019ve seen this pattern more in 2019 than perhaps any other\nyear in this decade-long economic expansion: market watchers and\nprognosticators cling to the slightest whiff of economic weakness, and use it\nto declare imminent recession. Whether it\u2019s the trade war, the inverted yield\ncurve, weak corporate earnings, negative interest rates, or some other concern,\nthe refrain is that this economic cycle is doomed \u2013 soon. <\/p>\n\n\n\n<p>________________________________________________________________________<\/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_10_21&amp;content=stock_market_outlook_report\">As the Bull Ages, Base Your Investing Decisions on Hard Data<\/a><\/strong><\/p>\n\n\n\n<p>Trying to time a recession, in my view, is not the best\noption. Instead, I recommend planning for the long-term. When preparing your\ninvestments for a potential recession, it is important to keep an eye on key\neconomic indicators. To help you do this, we are offering all\nreaders a look into our just-released <strong>November\n2019 Stock Market Outlook report.<\/strong><strong> <\/strong><\/p>\n\n\n\n<p>This report\nwill provide you with our forecasts along with additional factors to 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\nopportunity?<\/em><\/li><li><em>What industries within those sectors\nmost merit your 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\n$500,000 or more to invest and want to learn more about these forecasts, click\non the link below to get your free report today!<\/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_10_21&amp;content=stock_market_outlook_report\">IT&#8217;S FREE. Download the Just-Released November 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_10_21&amp;content=stock_market_outlook_report\">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>________________________________________________________________________<\/p>\n\n\n\n<p>There\u2019s also been a notable response in the equity markets\nto rising fear of recession. I\u2019ve been observing a notable rotation away from\ncyclical sectors and towards defensive sectors. In the third quarter, Utilities\nwas the top performing sector (+9.3%), followed by Real Estate (+7.7%) and\nConsumer Staples (+6.1%).<sup>3<\/sup> Since September 30, 2018 (roughly over\nthe last year), Consumer Staples and Utilities have been at the top of the\nperformance chain, with Staples outperforming Information Technology by a\nmargin of 2-to-1 and Utilities outperforming by a margin of 3-to-1.<sup>4<\/sup>\n<\/p>\n\n\n\n<p>Investors have also been hedging in other ways. There are\nnearly 2.5 times the amount of put options on the S&amp;P 500 Index as there\nare call options, and the cost of hedging has soared to one-year highs across several\nequity benchmarks.<sup>5<\/sup> <\/p>\n\n\n\n<p>The demand in the market to go defensive is clearly high,\nbut in my view, investors might be over-compensating \u2013 and <em>over-paying \u2013 <\/em>to defend portfolios against a recession that may not\nbe as imminent as many believe. &nbsp;&nbsp;<\/p>\n\n\n\n<p>As investors rotate, or consider rotating, into\ntraditionally defensive sectors like Utilities and Consumer Staples, many may\nnot realize that the Utilities sector\u2019s price to earnings ratio is at an <em>all-time high. <\/em>The Utilities sector\u2019s\nP\/E has risen ahead of previous recessions as investors have made similar\nmoves, but never to this degree. It is now the most overvalued sector, in my\nview. Consumer Staples is not far behind, which has me convinced that investors\nare over-playing the defensive hand, and paying dearly for it.<sup>6<\/sup> <\/p>\n\n\n\n<p><strong>The Recession May Not\nBe as Near as Many Believe<\/strong><\/p>\n\n\n\n<p>Manufacturing data was quite weak and there are clear signs\nthat global growth is slowing, in my view. But few reports point out that\nmanufacturing only makes up 10% of U.S. economic output, and that the U.S. and\nglobal economy are still expected to grow north of 2% in 2019. Services in most\ndeveloped countries remain strong and expanding, and the U.S. consumer \u2013 which\ncomprises some 70% to total U.S. GDP<sup>7<\/sup> \u2013 continues to spend at a\nhealthy clip. Patches of weakness are being counterweighed by bigger patches of\nstrength, in my view. <\/p>\n\n\n\n<p>I\u2019ll share a few more data points to support my argument. Small\nbusinesses, which are often considered a key growth engine for the U.S.\neconomy, have been increasingly reporting labor <em>shortages, <\/em>where 57% of owners have said they\u2019re hiring or trying\nto hire. A majority of these business owners have reported finding few, if any,\nqualified applicants for open positions. This points to strength in economic\nactivity, and also points to a skilled labor shortage in the United States (a\ngood problem to have, in my view). A key takeaway from the NFIB Small Business\nJobs Report is that \u201chiring has slowed down, but it\u2019s due to the inability to\nfind qualified workers, not because of a lack of customers.\u201d<sup>8<\/sup><\/p>\n\n\n\n<p>The U.S. consumer is another proxy for the health of the\nU.S. economy, and signs point to steady spending as we enter the holiday\nshopping season. Total retail sales for the June 2019 &#8211;\nAugust 2019 period was up 3.7% from the same period the previous year, with a\nparticularly strong showing in July.<sup>9<\/sup> In the latest ISM\nNon-Manufacturing report, the statement from the Retail Trade sector was that \u201cbusiness continues to pick up as we\nquickly approach Q4. Week by week, we inch closer to a much-anticipated holiday\nretail season, which requires not only last-minute buys, but a push to fill\nopen positions.\u201d<sup>10 <\/sup><\/p>\n\n\n\n<p>Finally, data in the broad labor market\nalso offers evidence of the U.S. economy\u2019s stability. Job growth as measured by\nnon-farm payrolls remains strong, with reports last showing that the U.S. added\n136,000 jobs in September, bringing the jobless rate (3.5%) \u2013 its lowest level\nin 50 years.<sup>11 <\/sup><\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>If the market delivers a positive turn of events \u2013 which we\nmay already see early signs of with a potential trade \u201ctruce\u201d \u2013 there could be\nan upside rally which effectively unwinds many of these defensive positions. We\ncould see mean reversion in cyclicals. <\/p>\n\n\n\n<p>Hopefully readers see the bigger takeaway here, however. In\nmy view, <strong><em>owning a diversified portfolio means that regardless of whether\ndefensive sectors or cyclical sectors outperform, you\u2019ll participate in the\nupside. <\/em><\/strong>Having a diversified portfolio, at the end of the day, is the\noptimal way to be on the defensive in uncertain economic times, in my opinion. <\/p>\n\n\n\n<p>Additionally, I recommend staying focused on the long-term and on key economic indicators. To help you do this, I invite you to <strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_10_21&amp;content=stock_market_outlook_report\">download our Just-Released November 2019 Stock Market Outlook Report.<\/a><\/strong><br> <br> This Special Report is packed with our newly revised predictions for 2019. For example, you&#8217;ll discover Zacks\u2019 view on:\u00a0<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Should you stay bullish?<\/em><em><\/em><\/li><li><em>What sectors <\/em><em>show the best opportunity?<\/em><\/li><li><em>What industries within those sectors\n     most merit your attention?<\/em><em><\/em><\/li><li><em>What produces U.S. optimism in the\n     coming year?&nbsp;<\/em><\/li><li><em>Year-end forecast for the S&amp;P<\/em><\/li><li><em>Small-cap vs. large-cap returns <\/em><\/li><li><em>And much more.&nbsp;<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest, learn how you may be able to prepare your portfolio for changes in the economy by reading this new report today.<em><br> <br> <\/em><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_10_21&amp;content=stock_market_outlook_report\">FREE Download \u2013 Zacks&#8217; November 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_10_21&amp;content=stock_market_outlook_report\">12<\/a><\/sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_10_21&amp;content=stock_market_outlook_report\"> <\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Some positive fundamentals indicate recession fears may be overstated <\/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-8295","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\/8295","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=8295"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8295\/revisions"}],"predecessor-version":[{"id":10692,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8295\/revisions\/10692"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8295"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8295"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8295"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}