However, while we are still not convinced that we have entered a bear market in shares, the growing storm clouds hanging over the US economy and the behaviour of equity markets over the last few months indicates it would be wise to be cautious for the next six months or so.
A US recession is now a 50/50 call.
While we think the cyclical bull market in shares has
further to run, risk has increased and suggests a more
cautious stance is warranted over the next six months.
Rising risk of a US recession
We have been of the view that whilst the risk of a US
recession is high at around 40%, the US economy should
ultimately muddle through with 1-2% growth this year
helped by a strong corporate sector, rapid action by the US
Federal Reserve (Fed) and a strong contribution to growth
from trade. Recent economic data releases call this into
question. For example, the US housing market remains in
free fall, but more significantly:
The Institute of Supply Management survey of
manufacturers has fallen to its lowest level since 2003.
Durable goods orders (which provide a guide to US
capital spending) are weak.
The US labour market is starting to slow, as shown by
the unemployment rate rising recently to 5%.
Various reports suggest that holiday retail sales growth
has been the weakest since 2002.
In other words, there is increasing evidence that the US
downturn is spreading from the housing sector. What's
more, the latest surge in energy prices has only added to
pressure on the US consumer and inflation worries have
arguably slowed the Fed in cutting interest rates. These
considerations suggest that it is now a 50/50 call as to
whether the US will go into recession or not.
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