The Stock Market Is Pricing In A Recession (But One Won’t Happen)

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Ben Strubel’s letter to investors for the month of November 2018, titled, “The Market is Pricing in a Recession.”

Dear Investors,

There had better be a recession coming soon! If that were a headline, you’d be shocked. Right? And if I said I agreed with the headline, you’d be shocked again.  Let me explain. To justify the stock market being down as much as it is, we need a recession. Look at this graph below from a recent Reuters article. Global corporate earnings are continuing to grow, but the stock market has fallen. Global markets are down about 10% for the year and the US market is a bit above flat.


Q3 hedge fund letters, conference, scoops etc

The only real way to justify the recent stock market performance is if we have a recession or a very significant slow-down in corporate earnings growth. If things continue on as they normally have, then the market should eventually bounce back. I don’t really see anything on the horizon that is a cause for great concern.

Jobs growth is steady. It’s hard to have a recession in a country where consumer spending accounts for about two-thirds of the economy and more and more people are working each month. It just doesn’t lend itself to consumers spending less money!

Government spending, which accounts for the next biggest portion of the economy, is also up. You might disagree with how and where it spends money, but government spending does create economic growth. Additionally, interest rates are rising, which means savers will have more money. Yes, the real estate market may suffer a bit as higher rates make mortgages more expensive, but the benefits from higher rates and the costs from higher rates generally offset each other. Although you hear fretting about a slowing housing market, remember that it makes up only about 5% of the economy today compared to about 10% pre-recession years. The housing market is only half as important to economic growth now as it was during the bubble years.

While the bubbling trade war with China gets a lot of headlines, it’s important to keep in mind that the amount of money being talked about, perhaps $50B to $100B, is small in relation to the size of the US economy. That amount equals about a quarter or a half a percent of US GDP. The amounts are definitely large enough to cause growth to slow down, but they are nowhere near large enough to tip the economy into a recession.

We’ll keep this letter short because so far we don’t see any cause for concern on the horizon. You can relax knowing that I am continually monitoring the economy and your investment portfolios.

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The performance data presented prior to 2011:

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  • Reflect the reinvestment of capital gains and dividends.

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