One theme I had for 2020 was that I believed we were going to have a lot of headline risk due to multiple events that create big negative headlines.
2020 Economic Forecast:
“Any stock market sell-off, correction, or near-bear market can drive money into bonds short term. With many headline-driven risks in play next year, don’t ignore the lower end of my bond market channel just yet. If growth picks up, even just a tad next year, then I don’t expect we will stay under the 1.60% level too long if we see headline risk. This has been the reality in this record-breaking expansion; short-term headline-driven events take us below 1.60% on the 10-year yield. However, we don’t stay there too long because we were never going into recession. Slowing growth took yields lower, but slower growth doesn’t necessarily mean an imminent recession. The failure to understand this has been a plague for the American Recession Bears.”
Unfortunately, an ominous usage of the word plague as the Coronavirus is a horrific human event but will also have an economic impact in the first half of 2020 for sure.
One thing that I have noticed recently is that the same people obsessed with recessions, QE, the Repo Man, Sub 50 ISM, Fed’s balance sheet, the Federal Reserve, in general, are really pushing a poor outcome with the Coronivurs. Not that I think these people are short the market unproperly, but I just think that some people always ice-skate uphill.
Never the less. With Corona Virus, Boeing, and another headline risk, the 10-year yield today is at 1.60% and can go lower if these headlines get worse.
As always, a lower rate of growth brings yields toward that 1.60% level and then bad headlines to drive us under. Since there wasn’t any second in this record-breaking expansion that we were going into recession, the 10-year yield tends to go above 1.60% again when growth picks up a bit.
Recently both Manufacturing data went into the positive together; this shows how bad the 2019 recession bears were with their immediate recession thesis. We shall see how much the Coronavirus takes a bite out of here. The key always with PMI data is that we already had a legit PMI recession in 2016, so the over-investment in the Shale Boom has been taken offline.
Non-Manufacturing ISM & Markit Data has picked up as well, though this data never went below 50 recently.
My focus since the inverted yield curve event of 2019 is that the event itself will be bullish because the fear of an escalated trade war would calm. However, don’t believe in the higher rate of growth story until the 10-year yield can close above 1.94% and see follow-through selling. We got to 1.94% but didn’t crack above it.
“For many months on social media sites, I have talked about how important it is for the bond market to close above 1.94% and get follow-through selling. A yield above 1.94% would mean that the bond market has more confidence that we will have higher growth next year. Until then, I would be skeptical of any story that predicts a higher rate of growth for 2020.”
With all that said!
Nothing has really changed with my recession model.
Right now, 3 of my recession flags are up.
1. The Fed Started the rate hike process
2. The unemployment rate gets down to a satisfied %, and for me, it was 4.9%
3. Yields inverted.
For me, my forecast at the end of 2017 was for yields to invert in 2018, and when it does, it will be the longest time before the first inversion to the recession. (December of 2018 inversion happened in my mind) We got 3 rate cuts after my inversion. I also considered the 2/10 inversion itself was as a bullish event for the U.S. economy.
On December 31st, 2017, on my outlook of 2018, I wrote this:
“I am also looking for yields to invert in 2018.”
“I believe we will see an inversion in 2018, but it won’t mean a recession soon. It would be the longest time before the first inversion to a recession ever in history if we inverted in 2018.”
The three remaining recession flags have not been raised.
4. Housing starts to fall into a recession. The housing data did have a scare late in 2018, but new homes sales and the monthly supply of new homes got a lot better in 2019. For now, we are good, but keep an eye out if yields go higher. Housing data tends to get soft when the 10-year yield gets higher than 2.62% at 1.60%; we are okay. Purchase application data heat months growth is showing double-digit growth year over year so far in 2020. I don’t expect any super growth in total home sales but good enough to keep this data line growing slowly.
Monthly supply, while still high for this cycle, isn’t above my critical 6.5 months level.
5. Leading economic indicators fall for 4 to 6 months straight. This hasn’t happened yet.
In 2019 I tried to impart how to interpret this data line. Look at the cone shape activity during the housing bubble years vs. the wave economic action in this cycle. We didn’t have a booming over- investment cycle outside the shale boom. PMI ISM data had 11 sub-50 prints (Below 50 means contraction) in this record-breaking expansion with no recession.
This data line has frustrated the bears for many years because every downturn in terms of rate of growth, they assumed it was the next recession. Know the components of this data line. Know that jobless claims have formed a bottom and that housing starts and PMI data has gotten better recently. However, the coronavirus might short term impact PMI data. Bears need to be patient here, let a clear downtrend happen first, this is my best advice I can give you now.
6. An over-investment in the economic cycle creates a big supply spike due to weaker demand, which will drag the entire economy lower.
Some are concerned about the amount of corporate credit and leveraged loans in the marketplace, but these factors should not create a recession in 2020. I would keep an eye out on the Auto Sector and commercial real estate. You can have a recession and not have core and control retail sales go negative year over year. This happened after the tech bubble burst. Retail Sales are coming out tomorrow, and this has been another data line that shows the wave of economic data in this record-breaking expansion.
I didn’t really want to write this article this early into 2020, but I can see the bears are really hoping that the Coronavirus is the event that brings America to a recession.
Recession Obsession creates Depression, it’s a hard way to live to be an American Bear since 1790. Ask an American bear for an economic model for their recession, they should be able to give you an answer. I would focus on the big data that matters now, not speculative theory. Don’t dismiss the Cornovirus and Boeing impact on the economic data as we have had many times in this cycle where GDP was negative or below 1%. However, don’t go straight to the recession crash thesis.
Be the detective, not the troll.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.