Will The Fed’s Capitulation Come Back To Sack Investor Portfolios?

In December of 2007, I offered readers insight into a predictive model for recessions. Shortly thereafter, in the first week of January (2008), Investor’s Business Daily highlighted my five-point model and its 80% probability of economic contraction.

One of the key components of the model is whether or not the future expectations of consumers are falling faster than how they feel about the present economic circumstances. The Conference Board’s Present Situation Index – an assessment of current business and labor market conditions – dipped slightly, from 169.9 in December 2018 to 169.6 in January 2019. Generally speaking, however, the indicator remains stable and strong.

In contrast, the Future Expectations Index has been journeying southward. Consumers’ outlook for businesses, personal income and labor market conditions fell 10.6% from last month and 23.8% from an exuberant peak in October.

consumer-con

Most analysts have decided that the recent loss of consumer faith is little more than a temporary reaction to financial market volatility. Few seem to think that the decline in confidence might be foreshadowing a meaningful slowdown in economic activity.

Still, one should be mindful of the historical relationship between the Conference Board’s “Present Situation Index” and the “Future Expectations Index.” In particular, peaks for the ratio between the ‘Present’ and the ‘Future’ have occurred shortly before the previous three recessions.

consumer-stuff

Perhaps the consumer trend is a minor bump in the road. On the other hand, credit spreads also provide reasons for concern.

For instance, my model suggests that 10-year Treasuries should compensate investors by 2.5% over 3-month T-Bills. Yet the difference at this particular moment is a trifling 0.26%.

Similarly, the third feature of my model looks at whether or not the spread between corporate bonds and comparable Treasury bonds are widening over a recent period. The spread with BBBs widened modestly throughout last year, before spiking in the 4th quarter.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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