Where We Have Been
The stock market had a 20% correction during the fourth quarter of 2018. This pullback was due to a number of issues but it was partially driven by the fear/anticipation of a domestic recession. We wrote numerous updates stating that we did not believe that a recession was “right around the corner.” We now have the proof to support our claim.
The Economy & 4th Quarter Earnings
Real Gross Domestic Product (GDP) grew at a 2.6% annual rate in the fourth quarter. This is above the 2.2% estimate. Even at 2.6%, the pace is a step up from 2.2% annual rate from mid-2009 (when the recovery started) through early 2017.
In 2018, real GDP grew at the fastest pace for any calendar year since 2005. And even more impressive is the fact that the year-over-year real GDP growth has accelerated in every quarter since the beginning of 2017.
Regarding 4th quarter earnings… companies delivered much better than expected results. Analysts expect 4th quarter growth will finish at 14.4% (up from 11.4% when earning season began). Sales growth has also been strong, and is expected to finish the quarter at 7.2% vs 6.0% estimate at the beginning of earnings season.
The truth is that income tax cuts and deregulation have boosted growth in the economy. We expect this trend will continue.
The Price Group Recession Indicators
Source: Clearbridge
Where We Are Going
A recession (i.e. two consecutive quarters of negative GDP growth) is very likely coming. Unfortunately, we do not know when.
Outside of a “black swan” type of event, there is not fundamental nor statistical data that warrants the anticipation of a recession in the coming months.
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