“Since last year real GDP growth has been slowing. The chair of the Federal Reserve has been signaling that, while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including inverted yield curves, have been ignored and markets continued to make new highs in July. In August a correction took a place and subsequently a rally in markets ensued into early September. On September 18 the Fed is cutting rates.”
What’s so special about that you ask? We all know this after all.
What if I told you you could use this very sentence and apply it to the market action in 2007?
Check it out:
The yield curve was inverted, growth was markedly slower in 2007 versus 2006, yet $SPX made a new high in July (same backdrop as now), there was an August correction (same as now) and then the Fed cut rates on September 18 (same as now), literally the same day. September 18:
Markets proceeded to make another marginal high and that was it. Lights out:
Hence I submit we are finding ourselves at a very curious moment in time as we have very similar elements running through these markets. Not saying it will resolve the same way, but the ingredients are there and all is needed is perhaps a trigger. And perhaps we saw the trigger this weekend. Too early to tell, but clearly something to be mindful of.
So markets topped in October 2007 following the rate cut in September. And here was Ben Bernanke in November telling everybody there won’t be a recession:
Bernanke November 2007:
“Federal Reserve Chairman Ben Bernanke told lawmakers on Thursday the U.S. economy did not appear headed for recession.
Our assessment is for slower growth, but positive growth, going into next year”
Recession starts December 2007https://t.co/icu7dY0XW3
— Sven Henrich (@NorthmanTrader) September 16, 2019
Does that not sound eerily similar to what Jay Powell has been telling us at this moment in time? Here’s Jay Powell on September 6:
“We’re not forecasting or expecting a recession,” he said. “The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up.”
“Our main expectation is not at all that there will be a recession,” Powell said.”
Yes there are differences as well and of course no period is alike, but the confluence of circumstances is impressive. Markets behaving in very similar ways, including dates and a Federal Reserve very much behaving in a similar way as well.
What does that all suggest?
Well, for one, the Fed will not tell you when a recession starts. They can and will be in total denial until after the fact. The 2007 recession literally started 1 month after Bernanke stated in front of Congress that there won’t be a recession. So when Jay Powell declares the same thing this week as he’s cutting rates know that such a statement has absolutely no meaning. “Not forecasting a recession” he stated on September 6. Powell’s Bernanke moment?
The avoid the same fate the task for markets then is what I suggested in Playing with Fire: Markets need to make sustained new highs or risk seeing similar circumstances to play out similarly.
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Categories: Market Analysis