Displaying items by tag: recession

(New York)

There is a big new risk to stocks to worry about, says Goldman Sachs. Actually, it is a not a new risk, it is an old one that investors have not been thinking about. The risk? Pay. The bank says that rising pay pressure from workers could hurt companies at all levels and eat into margins. The labor market is incredibly tight, which puts upward pressure on pay and downward pressure on corporate margins. Wage growth is already at its highest rate since 2007, and companies may feel the sting. According to Goldman, “While S&P 500 profit margins are at historical highs, survey data indicates a record level of corporate concern regarding labor costs”.

FINSUM: Many analysts have been predicting an earnings recession and this is one of the factors that could exacerbate it.

(Frankfurt)

American investors seem almost conditioned to ignore the rest of the world. Over the last decade that has been a pretty good plan as the US recovery and markets have had a Teflon coating that resisted global downturns. However, rates market in Europe is sending some grave warning signals. Try this on for size: several European junk bonds are now trading at negative yields. Yes, you read that correctly, investors are paying for the privilege of holding junk in Europe.

FINSUM: This is not some ultra-safe Germany sovereign bond that has negative yields. We are talking run-of-the-mill EU junk bonds having negative yields. That is a big warning sign.

(New York)

The yield curve inversion has largely faded from headlines. Things that become the status quo often do! But in that development lays a hidden but worrying truth—the longer the yield curve is inverted, the more likely it is that there will be a recession. The inversion has been in place for over a month now and it is actually getting worse, with long-term yields continuing to drop. A yield curve inversion has proceeded every US recession in the last 50 years.

FINSUM: If the Fed proceeds with cuts, it seems like the inversion may abate. But then again, the rate cut would be an implicit admission that we are on the way to a recession.

(New York)

Here is a data signal most of the market is not paying attention to when it comes to recession forecasting: nationwide capital expenditure, or Capex. Morgan Stanley’s index of capex has shrunk to its lowest level in two years, as the high from the Trump tax cuts wears off for companies and they tighten purse strings. Capex growth is likely to weaken from 11% last year to just 3% this year. According to the deputy CIO of State Street, “Low capex growth is very worrying … You’re starting to see the trade tensions and the macro growth concerns play out in business confidence — companies won’t open a new factory if they think we’re on the cusp of a recession”.

FINSUM: This is a worrying sign but not wholly unexpected given the waning benefits of the tax cuts. However, even though this is expected, it does not mean it won’t hurt the economy.

(New York)

Earnings recessions don’t always hurt that much, but they don’t help. Just look at the 2015-2016 period, when earnings didn’t perform well. Markets didn’t lose much, but they were mostly flat. Now we are re-entering that paradigm, as many companies are cutting earnings and it looks like the first earnings recession in three years is coming. Earnings are very likely to fall in the second quarter, with average analyst estimates calling for a nearly 3% decline across the board. So far, 20 of the S&P 500’s companies have reported and the average earnings fall has been 15%.

FINSUM: A bigger than expected decline in earnings could seriously change the risk-reward outlook of markets. This seems like an important risk right now.