Risk of a recession is being overlooked by investors: Investment expert
Investors who are putting their money in the U.S. equity markets might be underestimating the threat of a coming recession, one portfolio manager is warning.
Speaking to BNN Bloomberg’s Paul Bagnell on Monday, Colin Stewart, chief executive officer and portfolio manager at JC Clark Limited, said the visible slowdown in demand for goods and services, alongside direct caution from the U.S. Federal Reserve, is signalling a clear recession ahead that equity investors appear to be ignoring.
“On one hand, you have the Fed saying there’s a recession coming, the bond market acting like there’s a recession coming, and yet the S&P 500 is still trading at 19 and a half times earnings so it doesn’t really think equity investors are all that worried -- there’s a bit of disconnect there,” Stewart said.
While he isn’t calling for a repeat of the 2008-2009 financial crisis, he does believe the markets are bound to suffer from an economic blow that is not being priced in.
“The equity market is not really acting like there is (a risk) of a recession,” Stewart said.
A leading indicator he is watching is the decline in cargo transportation. Stewart warned that this shows consumers are not buying as many products as before. He also pointed to the recent weakness in the U.S. labour market as another negative data point that is being overlooked by investors.
“The labour market has obviously been very, very, strong, but if people start losing their jobs that can be a tipping point for the economy,” he added.
In this environment, Stewart advised that investors position themselves in defensive businesses that tend to be less economically sensitive, or, find alternatives such as treasury bills and money market funds.
“It’s a good time to be in be in a) defensive type sectors (or) b) holding some cash,” he said.
Calls for a recession have been echoed for months now within the investment community with the threat to Canada’s economy being no exception.
One of the country’s most prominent economist told BNN Bloomberg in March that Canadians are staring a recession in the face. David Rosenberg, president and chief economist and strategist at Rosenberg Research, has warned that the recent string of interest rate hikes from the Bank of Canada and the Fed have yet to work their way through both economies.
“We haven’t seen the full blunt of what these central banks have done,” Rosenberg said.
As for timing, another economist says both the U.S. and Canada are likely to see the economic blow in the third quarter of this year.
“In our view you’ll see the (economic) data deteriorate from here,” David Doyle, head of economics at Macquarie Group, told BNN Bloomberg in an interview in April.
He, like many others, is watching the labour market in both countries for signs of how severe a potential recession will be in addition to interest rate impact.
“We think the second half of the year could be challenging for investors in that your confronting a recession and at the same time central banks that might not be tightening anymore but aren’t yet prepared to ease,” he added.