It’s No Time to Let Your Guard Down as a Recession in 2017 Remains Possible
Don’t let your investment guard down yet. The Dow Jones may have closed at a new record, above 22,500 points, but there’s still time for a massive recession in 2017. The big question now is this: When will this magic ride on the stock market end? A famous physicist, Nils Bohr, liked to say that making predictions is difficult, especially those that concern the future.
Still, there are enough indications in the economy now to raise your concerns. A U.S. recession in 2017 would likely drag down the rest of the world as well. Europe has just started to recover, catching up with the United States, but its economic growth remains fragile. It still needs nursing from ultra-expansionist monetary policy. Unlike the Federal Reserve, the European Central Bank has not yet started to lift rates.
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Also Read: The Upcoming Economic Recession in 2017 Has Already Begun
Briefly, the current economic picture is as follows. Yes, the U.S economy has grown, but in the grander scheme, the two- to three-percent growth (which could be revised downward by the damage from Hurricanes Harvey and Irma) is not impressive considering historical U.S. growth levels. Then, there’s a hidden inflation, the one that Janet Yellen says she made a mistake about. That would reduce the impact of any growth.
Such is the context in which the Fed has indicated it will raise rates. It’s no wonder the Fed has hesitated. The excuse was that the inflation figures may not have been accurate. But, looking at the Dow, an argument can be made that the Fed does not want to send the markets plunging with the rigorous rate hike schedule first mentioned. (Source: “Art Cashin: The Fed projects 3 rate hikes for 2018, but Trump could change that,” CNBC, September 21, 2017.)
Eight Years of Artificially Induced Economic Expansion
The United States has now completed about eight years of economic expansion. That is far higher than the average expansion periods since World War Two: five years. (Source: “Op-Ed: A history of economic cycles going back to the 1850s suggests a recession is near,” CNBC, June 27, 2017.)
So the U.S. recession clocks, simply based on statistics, are already sounding the alarm. Especially because the stock market and the economy have recovered through record levels of liquidity. But, sooner or later, the markets and the economy must let go of the life support that central banks have provided.
After years of gains, most stocks on Wall Street appear to have gone way past their maximum potential. That is, many stocks are too expensive; they’re trading at unrealistic price-to-earnings ratios. Even if Trump and Congress can find a way to convert the massive tax cut promises into reality, the U.S. economy is not magically spared from the risk of a recession in 2017—or 2018, for that matter.
At best, investors could become more “exclusive.” In other words, they will start looking for real value, whether in terms of the risks ahead (defense stocks, for example) or leaving the stock market altogether in search of safer investments like gold. Moreover, should inflation surge—leaving the Fed with few excuses—the Fed could be pushed to raise rates faster, accelerating the risk of a recession.
The U.S. economic environment is characterized by a dichotomy. On the one hand, consumption is slowing down, judging by the frequent numbers of retail outlet closures. Industrial activity has not seen any noteworthy increase since Trump entered the White House. The president’s protectionist measures and renegotiations of international trade treaties could also backfire, creating barriers to American goods and services abroad.
