Next Recession – Stocks Will Likely Go UP!
The Next Recession
This article is an excerpt from a comprehensive economic report for investors that can be found here: Comprehensive Economic Overview For Investors by Sven Carlin, Ph.D.(it is FREE).
Next recession is likely to be postponed – Whatever it takes
Central banks and politicians have been doing whatever they can to postpone a recession. As soon as the situation in Europe started to slow down, the ECB launched a new bond purchasing plan where the bank intends to purchase €20 billion per month for as long as it takes for the euro zone’s inflation and growth outlooks to return to satisfactory levels.
Figure 8 Historical ECB financial injections start again in November 2019
Source: ECB
This simply means that the ECB will print as much money as necessary for as long as necessary to sustain economic growth and stability. The ugly fact is that as soon as they stopped pumping free money into the system, the economy cooled off immediately.
Similarly, as soon as the FED increased interest rates, it was clear that due to the already high public, corporate and private debt levels, interest rates can’t really go much higher.
Figure 9 Effective Federal Funds Rate 2014-2019
Source: FRED
Monetary, fiscal policy and recessions
The thing is that recessions are a natural economic process and using whatever method to delay them, works for a while, but the future costs might not be worth it. We are already seeing how interest rates, that are usually the first method to use to regulate economies, can’t be lowered much anymore. We are now seeing how the second method, purchasing financial assets is also reaching its limits, even in extremely positive times.
The third method, often called modern monetary policy, is a method where fiscal and monetary policy work together to stimulate the economy. Money is printed and given directly to the government. From the clues that we can get, where the new ECB president has been openly calling for more fiscal stimulus in Europe, have it financed by the ECB, we are just a step from a coordination of monetary and fiscal stimulus. The important thing for investors is, to quote: “governments who have the capacity to use the fiscal space available to them should spend on improving their infrastructure.”
Improvements in infrastructure mean more demand for the related industries. A thing to keep in mind when investing.
In short, this simply means that companies in Europe will continue to be able to get free money, but I wonder whether it will help them remain competitive? As said in the beginning, it is not about debt, it is about productivity. Plus, at some point, somebody is going to yell that the king is naked and not accept the euro, or some other currency, as reserve currency. Imagine dealing with currencies where the counterparty has a printing press that can be used whenever necessary.
The next recession and its impact
Nevertheless, economic slowdowns are natural and will happen again. We don’t know when, but we can rest assured it will happen again. The question is: What will be the impact?
Well, the last two times there was a recession, the S&P 500 fell close to 50% from top tick to bottom tick.
So, many expect that the next recession will have a similar impact on stocks. However, history tells us that the average stock market decline during a recession is just 5.6%. Plus, all what we discussed above about financial stimulation, might really push stocks even higher despite a recession as central bankers and politicians will probably put money directly into your hands to help you buy whatever and push the economy higher.
So, when it comes to recessions, and especially in the current environment, it is really uncharted territory. It looked bad last two times, but there is absolutely no guarantee it will be the same a third time. We are in an environment where nobody knows what it will look like.
The investing message is simple, invest in businesses that will do ok if there is a recession and do good if there isn’t one. Buying businesses that will go bust in a recession is gambling.
This article is an excerpt from a comprehensive economic report for investors that can be found here: Comprehensive Economic Overview For Investors by Sven Carlin, Ph.D.(it is FREE).
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