Economic Mantra for 2018: Don’t Panic



Was what happened in February a fluke or the beginning of a fall? 

2/13/2018

Just one week ago it appeared as if the United States was headed toward another recession.  That is, if you read just the headlines.  On February 5th of this year the headlines were all about the worst one-day point decline in Wall Street history.  A few days later, when the market dropped again, the headlines read “Dow plunges and sinks into correction.”  Just today, February 13th, CNBC quoted a contributor as saying the US economy is ‘an accident waiting to happen.’  If you take the plunge at face-value and add in the headlines, it appears as if the US economy is about to be in bad shape.

But is it, really?

“Markets don’t just go up without volatility,” said KC Mathews, Chief Investment Officer of UMB..  Along with Eric Kelley, UMB’s Director of Fixed Income, Mathews spoke to a room full of clients and other investors about what he feels are the true “big bad wolves” of the economy.  Just last Friday the market went into a 10% correction which again, if you just read the headlines, can seem ominous.   Today, Mathews assuaged the crowded ballroom of investors reminding them that corrections are natural.  “We hadn’t seen a 5% correction in 80 weeks, usually we see them every 10 weeks.  Expect more volatility.”  Mathews added he does not expect any sort of recession for another 12-18 months at the earliest.  “We had a Great Recession but we didn’t have a great recovery,” says Mathews.  “We had a great moderation.  We don’t have the built-up excesses that precede a recession.”

So why the knee-jerk reaction and the ‘world is ending’ headlines from major media outlets?

According to Mathews and Kelley, we are hit every day with ‘perceived’ economic threats, or what they deem ‘sheep in wolves’ clothing.’  These are things like weather, military action and social unrest.  If you look at the chart below, you see some are highlighted in orange.  Those are what Mathews and Kelley believe COULD become actual threats but for now they are not economic ones.  Are they human threats?  Absolutely.  But according to Mathews, the true threats are defined as having “material and sustainable disruption to the markets.”  Often these are mistaken and blamed for any economic downturn.

UMB List of perceived threats to economy

Chart showing how US economy changed during Gulf War

On the other side of the coin are the actual threats to economic stability which Mathews and Kelley nicknamed ‘the big bad wolves.’  The biggest one they pointed out was policy mistakes.  They went over what happened in the 1970’s with Fed Chair Paul Volcker when the economy dropped into a double-dip recession.  But because of the moderate growth and recovery we’ve seen since the Great Recession in 2008, Mathews and Kelley believe we aren’t having the right build up to allow us to drop into a recession, yet. 

 

2018 UMB Forecast

Instead, Mathews and Kelley say the data they’ve analyzed has us continuing slowly but surely on an upward trend of moderation and they add that the recent change in the head seat at the Federal Reserve shouldn’t change much about that.  Both men feel that rates will go uo with the change in Fed Chair, things like money markets, 10 year notes and mortgages, but are quick to add “they’re higher rates for the right reasons.”

 

Here is Mathews explaining what he saw as the main reason behind the market volatility in early February: