FYI | Apr 03 2019
By Peter Switzer, Switzer Super Report
Should recession fears prompt you to dump growth stocks?
Over the past few months I’ve been trolled on Twitter by those ‘bush economists’ who think we face a house price Armageddon. It culminated in a debate on my Money Talks TV programme between a doomsday merchant, John Adams (a former economic adviser to Libs Senator Arthur Sinodinos) and AFR columnist and Coolabah Capital Investments, Chris Joye.
Reacting to some of the comments on Twitter, one genius said the debate suffered from dodgy data. I replied that most data has a dodgy aspect and when it comes to economics, it’s really just a guessing game. However I always like to get my guessing help from the smartest people I can recruit.
In my lifetime, I’ve had help from smart people and dumb people — the smart ones usually work out best!
My function each week here in my Monday column is to think out loud on subjects I think you should be pondering. I always say when it comes to wealth-building, business-growing and any kind of high level endeavour or self-improvement, it’s great to have an objective set of eyes.
And it’s great when those eyes are owned by really smart people.
Last week I suggested not getting too spooked about an inverted yield curve and the likelihood of a recession.
Over the weekend, Shane Oliver from AMP Capital gave us 5 reasons “not to be too concerned by the latest plunge in bond yields and a negative yield curve.”
Here they are:
- While a negative yield curve has preceded past US recessions (the lag averages around 15 months), there have been numerous false signals and following yield curve inversions in 1989, 1998 and 2006, shares actually rallied.
- Other indicators are not pointing to imminent global recession. In particular, we have not seen the sort of excess – overinvestment, rapid debt growth, inflation, tight monetary policy – that normally precedes recession.
- Bond yields lag shares, with the bond market catching up to last year’s growth scare that depressed share markets. Following the February 2016 low in shares, bond yields didn’t bottom until July/August 2016.
- The retreat from monetary tightening has been a factor behind the rally in bonds but this is actually positive for growth.
- Part of the reason for the rally reflects investors unwinding expectations that central banks would continue pushing towards tightening. What the decline in bond yields reminds us though is that the constrained growth and low inflation malaise seen since the GFC remains alive and well. The latest plunge in bond yields will keep the “search for yield” going for longer, which is positive for yield sensitive investments like commercial property and infrastructure.
The big watch for me to pass on to you is about the run of economic data, the effects of a signed Trump trade deal, stimulus in China, the EU and elsewhere, as well as efforts by central banks worldwide to keep interest rates helpful for economic growth.
Locally, we are set to see the Government embark on an RBA-supported bout of tax cuts, which might mean it won’t cut rates this year. But remember, Shane Oliver, Westpac’s Bill Evans and NAB’s Alan Oster, to name three, all expect two rate cuts this year!
This is Oliver’s take on what he expects to see unfold globally for the economic and market outlooks.
“If the momentum of global data – particularly global business conditions PMIs (Purchasing Managers Indexes) – doesn’t soon start to stabilise and improve as we expect, then the decline in bond yields will start to become a deeper concern. Either way share markets remain vulnerable to a short term pull back.”
The take-aways from Shane are:
- Expect economic conditions to improve.
- A short-term sell off should not surprise.