Friday capped off a rough Q3 for investors with more volatility. Fears of looming recession have risen—tied mostly to debt fears (both across the pond and in the US) and some economic statistics showing slowing growth rates. Correspondingly, some economic forecasters have cut their estimates for growth.
But is a recession actually likely? To better assess the probability, one would have to dig deeper than stock market fluctuations over a few months’ time. There is a historical relationship in which stocks typically lead economic activity, but it’s not as clear and direct as some would make it out to be, particularly in the short term. In fact, there are many historical examples in which sharply negative periods like Q3 (two quick examples being 1998 and 2010) did not presage recession and, in fact, turned around in relatively short order. So with the plethora of false reads stock market corrections show, of primary importance are fundamental economic data. And recent data don’t support the view a new recession is likely in the here and now.
Consider the points below, all released this week:
Add this to other data released earlier from around the world—even Europe—and what becomes more clear is recession fears have risen. But weighing positive and negative data today shows the scales continue to be tipped toward a likely continuation of actual economic growth.
A typical characteristic of corrections is sentiment that disregards fundamentally positive data—and we’ve sure seen a lot of that lately. Many media sources illustrate this well, with headlines playing up what we’ll call the “yeah, but” effect. For example, headlines akin to “US Data Better, But Let’s Get Real” abound.
We fully understand risks exist—a universal truth that’s no different today. To be sure, eurozone politicians have work to do, and US economic growth rates could be better. But what folks seem to fear most today is just that—fear.
As we’ve written, there are two primary ways to look at market volatility: forward or backward. Today, the sentiment of professional forecasters, investors and media has shifted to a more negative bent, setting the stage for a future rebound by lowering expectations. Absent some surprising, materially new and powerfully negative factor, a continued bull market ahead seems quite likely to us.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.