Recession Fears: Who Do Believe: Trump Advisers, Economists or Politically Motivated Websites?

The major U.S. stock indexes rallied on Monday on the back of a rebound in Treasury yields that helped dampen fears of a U.S. recession. Renewed optimism over U.S.-China trade relations also contributed to the price surge.

Hopes of more stimulus from major central banks also brought in the buyers after the People’s Bank of China (PBOC) unveiled an interest-rate reform over the weekend aimed at lowering borrowing costs for Chinese companies. Germany is also said to be preparing fiscal stimulus measures in case the country’s economy falls into a recession.

In the cash market on Monday, the benchmark S&P 500 Index settled at 2923.65, up 34.97 or +1.25%. The blue chip Dow Jones Industrial Average finished at 26135.79, up 249.78 or +0.99% and the technology-based NASDAQ Composite closed at 8002.81, up 106.82 or +2.40%.

Trump and Advisers See No Recession

Optimistic comments from President Trump and two White House officials over the week-end also helped underpin the markets early in the session.

Trump told reporters on Sunday, “I don’t think we’re having a recession. We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they’re loaded up with money.”

President Trump’s chief economic adviser, Larry Kudlow told “Meet the Press’s” Chuck Todd on Sunday, “Well, I’ll tell you what:  I sure don’t see a recession. So I think actually the second half, the economy’s going to be very good in 2019. No, I don’t see a recession.”

Another of Trump’s trade advisers, Peter Navarro, defended U.S. policy, predicting a “strong economy through 2020”, while disputing a bond-market indicator of approaching recession that last week sent stocks into their largest one-day sell-off this year.

Navarro further added, “I can tell you with certainty that we’re going to have a strong economy through 2020 and beyond,” he said.

Trading Recession Headlines:  A Dangerous Play

The debate continues over whether there will be a recession or not. With the news services blaming last week’s sell-off on the so-called “recession signal” in the bond market.

I have said several times over the years that steep short-term plunges in the stock market are caused by investor uncertainty. It’s a blueprint followed by money managers, “when in doubt, get out”. If money managers see a recession on the horizon, they are not going to be selling like there is no tomorrow, they are going to get out slowly and in an orderly fashion, thus forming a bear market with a series of lower highs and lower lows.

The politically motivated websites want you think a recession is right around the corner. In fact, several over the weekend kept referring to “Economist Polls” that indicate a recession. What they leave out is the study by Credit Suisse which showed that stocks actually rally after the Treasury yield inversion, and that a recession actually occurs on average at about 22 months after the 2-year and 10-year Treasury yields invert.

Look at the Positive

Before you just sell your stock holdings because of a “Headline Recession”, keep in mind a few things. Just suppose that major investors in Asia and Europe piled into 10-year and 30-year U.S. Treasury notes and bonds because they were offering better yields then they could get at home. Wouldn’t that drive yields lower?

Just suppose that we look at the plunge in yields as a warning sign that the central banks had better wake up and do something to prevent a recession. Did you read about any central bank policymakers saying, “Oh well, the 2-year/10-year Treasury yield spread just inverted. We’re going to have a recession and there is nothing we can do about it?” The answer is no. All, including the People’s Bank of China and the European Central Bank, have or expected to take a proactive approach. And, Fed Chief Jerome Powell may even offer more optimism for investors if he says on Friday at Jackson Hole that the Fed is willing to act aggressively to prevent a U.S. and global recession.