Setting the Stage for the Coming Recession

Brian Smedley, head of the Macroeconomic and Investment Research Group at Guggenheim Investments, explains what the data tell us about the timing and severity of the coming recession.

Key Takeaways:

  • Fed rate cuts could start to have more impact, but so far data are consistent with our recession forecast, which also suggests the next recession will be of average severity.
  • Limited monetary and fiscal policy space may prolong the recession; the Fed doesn’t have much room to maneuver on rates, and the effect of 2018’s one-time tax cuts has worn off.
  • When the business cycle turns, the Fed is likely to pull out all the stops by cutting rates to the zero bound and recommencing asset purchases.
  • Historical evidence of “successful” Fed cuts is mixed, however, and it is difficult to correctly time policy moves.
  • At this point in the cycle, we believe there is more risk to the downside than upside and caution investors to focus on capital preservation.

Source: Guggenheim Investments 

Market Update: March 13, 2017


  • Traders cautious ahead of Fed decision. The S&P 500 is modestly lower this morning after advancing Friday, led by utilities (+0.8%) and telecom (+0.7), but snapping a six-week winning streak. Energy (-0.1%) lagged, but held up well given the 1.6% drop in the price of oil. Investors are trading cautiously ahead of the Federal Open Market Committee (FOMC) meeting, which begins tomorrow; the market has priced in a 25 basis point (0.25%) rate hike. Overnight, Asian markets were led higher by the Hang Seng (+1.1%) and Shanghai Composite (+0.8%); Korea’s KOSPI (+1.0%) continued to climb after the country’s president was removed from office on Friday. European exchanges are mostly higher in afternoon trading, with the STOXX Europe 600 up 0.4%. Meanwhile, WTI crude oil ($48.30/barrel) is higher after last week’s slide, COMEX gold ($1203/oz.) is up modestly, and the yield on the 10-year Treasury note is up 0.01% to 2.59%.


  • Busy week ahead in a very busy month. March is an unusually busy month for global markets. This week, the FOMC meeting, along with Bank of Japan and Bank of England meetings, are accompanied by an election in the Netherlands, a press conference by Chinese Premier Li, and a ton of key U.S. economic data (retail sales, CPI, housing starts, leading indicators). President Trump will release his fiscal year 2018 budget document, the G-20 finance ministers meet in Germany, and the U.S. will hit its debt ceiling.
  • FOMC preview. This week, we ask and answer key questions that investors may have about the Fed and monetary policy ahead of the Federal Open Market Committee (FOMC) meeting. With a 0.25% rate hike fully priced in, markets will want to gauge the pace and timing of rate hikes over the rest of 2017 and into 2018, as well as Fed Chair Yellen’s thoughts on fiscal policy and the impact on monetary policy.
  • How much does the current bull market have left in the tank? The bull market celebrated its eighth birthday last Thursday, March 9. During that eight-year period, the S&P 500 rose 250% in price and more than tripled in value (including dividends), leaving many to ask the question: How much does this bull run have left? We try to help answer that question by looking at some of our favorite leading indicators. Although valuations are rich and policy risks are high, none of our favorite leading indicators are sending signals suggesting the bull market is nearing its end.
  • The weekly win streak is over. The S&P 500 ended with a slight gain on Friday to close the week down 0.4% – just missing out on the first seven-week win streak since late 2014 and ending a six-week win streak in the process. The big move last week came in crude oil, as it sank more than 9% for the week – the largest weekly loss since right before the election. Small caps, as measured by the Russell 2000, fell 2.1% and high yield also saw a big drop. Many have noted that weakness in energy, small caps, and high yield could be a warning sign for large caps. We will continue to monitor these developments.



  • ECB’s Mario Draghi Speaks in Frankfut
  • China: Retail Sales (Feb)
  • China: Fixed Asset Investment (Feb)
  • China: Industrial Production (Feb)


  • Small Business Optimism Index (Feb)
  • Germany: ZEW (Mar)


  • Empire State Mfg. Report (Mar)
  • CPI (Mar)
  • Retail Sales (Mar)
  • FOMC Decision (Rate Hike Expected)
  • FOMC Economic Forecasts and “Dot Plots”
  • Yellen Press Conference
  • General Election in the Netherlands
  • China’s Premier Li Holds Annual Press Conference


  • Philadelphia Fed Mfg. Report (Mar)
  • US Debt Ceiling Reinstated
  • President Trump to Release His FY 2018 Budget
  • UK: Bank of England Meeting (No Change Expected)
  • Japan: Bank of Japan Meeting (No Change Expected)


  • Index of Leading Indicators (Feb)
  • G20 Finance Ministers Meeting in Germany






Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

3 Economic Trends Investors Should Watch over the Rest of 2015

© Tim Rue/Bloomberg/Getty Images
© Tim Rue/Bloomberg/Getty Images

The U.S. economy is on the mend. Finally, the global economic crisis of 2008 and recession appear to be in the rearview mirror.

The Federal Reserve’s latest policy meeting revealed that Chair Janet Yellen and team remain on track to begin interest rate hikes this year. The Fed’s ultra-loose monetary policy stance, with near-zero percent interest rates, has served its purpose, and the central bank is signaling the economy is strong enough to handle a gradual move higher in interest rates.

There are several economic trends the Fed is monitoring in regards to the timing of the first interest rate hike, which many economists expect to come at the September 16-17 Fed policy meeting.

1. GDP growth rate.

Overall total gross domestic product growth for 2015 will likely be 2.5 percent, according to The Haverford Trust Co., a Philadelphia-based wealth and advisory firm. The 2.5 percent forecast follows a 2.4 percent GDP rate in 2014, but it still remains below a more historically normal 3.5 percent growth rate. A key driver of this year’s growth is the consumer – after all, consumer spending accounts for roughly 70 percent of U.S. economic growth.

“The second half [of the year] should be decidedly stronger than the first half. We expect the consumer to begin spending more as job and wage gains continue,” says Hank Smith, chief investment officer at Haverford Trust. Car and truck sales have been strong, with 2015 sales forecast near 18 million units, the highest level since the early 2000s, Smith notes.

Lower gas prices this year have also been a boon to consumers. The national average price for a gallon of gasoline stood at $2.81 a gallon in mid-June, 86 cents per gallon lower than a year ago, which saves motorists $335 million each day, according to data from GasBuddy, a website that monitors retail gasoline prices. But not all of consumers’ savings have gone toward new purchases.

“A lot of the gas savings has been used by consumers to retire debt,” says Curtis Holdensenior investment officer at Houston-based financial planning firm Tanglewood Wealth Management. “This does not help the economy a lot today but will be beneficial in the future, as consumers will be better able to spend and borrow in the future since they have a healthier balance sheet.”

2. Inflation.

While low prices may sound good to consumers, they reveal a lack of demand in the overall economy. It’s Economics 101: Higher demand drives up prices and generally reflects strong underlying economic activity. This matters to the policymakers at the Federal Reserve because the central bank has been tasked by Congress with a so-called “dual mandate” of promoting maximum economic growth along with stable prices. In the past 12 months through May, the core consumer price index climbed 1.7 percent, which is below the Fed’s 2 percent target rate for inflation.

Experts expect inflation to remain subdued. “It might pick up a fraction of a percent. There are two secular forces that are very disinflationary: technology and an oversupply of labor worldwide,” Smith says.

The muted inflation levels are not expected to stop the Fed from raising interest rates this year, but could keep the number of rate increases to a minimum. “The Fed will be very slow in its interest rate increase. We think they will still hike rates, but it will probably be slow – to the tune of one hike every other meeting,” says Jason Pride, director of investment strategy at The Glenmede Trust Co., a Philadelphia-based investment and wealth management firm.

3. Labor market.

The employment picture has been improving in 2015, and most economists expect hiring to remain relatively strong. In May, the economy added 280,000 new nonfarm jobs, which followed 221,000 new jobs in April. The civilian unemployment rate stood at 5.5 percent in May, down from 5.7 percent in January.

“We’ve made great strides in improvement of the employment picture,” Pride says. “The most important thing is that we’re getting close to a key inflection point where the labor market is getting tight enough that businesses will have a hard time filling jobs. Therefore, they’re going to have to start compensating more, which will cause wages to rise.”

Market impact.

So what do these economic trends mean for investors?

The Federal Reserve has been broadcasting its intention to raise its key policy rate, the federal funds rate, this year, which will not be a surprise to the stock market. The central bank will be hiking interest rates in reaction to a stronger economy, and overall increases are likely to be minimal. The federal funds rate currently stands at zero to 0.25 percent, and analysts expect one or two 0.25 basis-point interest-rate hikes this year, at most.

“While we expect the Fed to modestly increase interest rates in late 2015, we do not believe this will have any meaningful negative impact on the economy or U.S. equity prices,” says Ernie Cecilia, chief investment officer at Bryn Mawr Trust, a Bryn Mawr, Pennsylvania-based wealth management firm.

He expects any interest rate hikes to move at a slow and deliberate pace. “In this environment, domestic equities can generate positive returns, albeit far less than what has been experienced over the recent past. Any increase in domestic equity prices is likely to be a function of increased corporate earnings,” Cecilia says.

Pride says stock investors should remain in equities but be selective. “Find individual values where you can take them, and tilt toward the international spectrum because that’s where the valuation opportunity is with economic improvement,” Pride says.

For long-term investors, asset allocation and diversification remain important.

“Today, bonds serve only one purpose, and that is to reduce near-term volatility. You can get more income from stocks than you can from bonds. Because bonds continue to be overvalued relative to stocks, investors should be at their maximum exposure to equities,” Smith says.

Written by Kira Brecht of U.S. News & World Report

(Source: U.S. News & World Report)