The Second Half Of 2018 In One Word

Submitted by Nicholas Colas of DataTrek Research

Let me offer up a one-word summary of how I see the second half of 2018 for equities: “Recession”.

Don’t worry – this isn’t a doom and gloom prediction. Rather, it is the three-syllable description of the fulcrum issue for stocks. And since correlations tend to rise during periods of volatility all this also applies more or less to global equities as well.

Here’s our thinking:

#1) Corporate managers live at the margin when it comes to planning incremental hiring and capital expenditures. Tax reform is baked into their numbers for 2018 and 2019, making the uncertainty around trade and tariffs their primary planning headache. So even though corporate earnings are +20% in 2018 because of lower tax rates, managers may start to reduce hiring and capex plans if they begin to fear the impact of a trade war on their business. Spook them enough, and they will start to reduce headcount. That could turn into a self-reinforcing cycle that ends up in recession.

Conclusion: the current administration may win some trade battles, but it will be up to the private sector to determine the economic outcome of a trade war. Markets will have their hands full assessing that trade-off of political headlines and micro fundamentals in the second half of 2018.

#2) “As good as it gets” syndrome. Expect someone to come up with a FOMO-like acronym for this one – the notion that US economic and corporate earnings growth both hit their peaks in the first half of 2018. Q2 earnings, for example, will likely show “only” 20% earnings growth versus 25% in Q1. Back half GDP will not likely be as strong as the +3.0% number most expect for Q2. And when growth slows, multiples contract. Stock prices decline, corporate managers start to fire, and the cycle we mentioned in #1 kicks into high gear.

Conclusion: for such a squishy concept, we do worry about this one. The offsetting positive for US stocks is that European growth is even slower, and Emerging Markets will struggle with the trade war issue. So investors with fixed equity exposure will still have to own something, and this calculus points to US stocks. This limits the damage to domestic equity prices, and the US could be spared a recession as a result.

#3) Federal Reserve policy. The decline in the difference between 2 and 10 Year Treasuries since the start of the year is remarkable. The spread today – just 31 basis points – is the tightest since July 2007. History is clear about what happens when that number goes to zero: a recession is on the way. In cases where there is a geopolitical shock, the combination of that event and a flat yield curve makes the contraction in economic output even worse.

Conclusion: expect to hear the chorus warning of a “Fed Mistake” in the second half of 2018 to grow as loud as the finale of an Italian opera. What they may be missing: how would the US stock market respond if Chair Powell did admit to concerns about the economy and slowed the pace of rate hikes? Our prior points describe one potential negative feedback loop that makes this a potentially risky option. Which means this debate will rage through 2H 2018.
Summing up: we don’t see a recession in 2018 or 2019, but we believe the dominant market narrative will revolve around this topic in the back half of 2018

Comments

karenm Thu, 07/05/2018 - 16:28 Permalink

No mistakes or "Unintended consequences"

 

That's propaganda for the dumbed down herd so they don't figure out their overlords are just evil.  And as for "No recession," that too is bullshit, as America never got out of it in the first place.

 

The media may not declare the recession, like in 2008, where later the FED admitted the recession started in 2007, but rest assured, the recession will be here and very real.

Free This SWRichmond Thu, 07/05/2018 - 17:05 Permalink

MK ULTRA Alpha is a classic Jewish mole people, straight from Mossad, and his Chinese agent Jacks Ma, two evil sons of bitches. They are disinformation agents and quite good at what they do, watch them, read them, and you will see it us psyop, to actually gin up support for Jews here. It's quite amazing how they do it, but I've been reading all their posts and it is quite obvious to me now - THEY ARE JEWS, ZIONISTS, agent provocateurs.

Just read their dripping hate for America, right out in the open, and deceiving so many, God they are good at what they do, but I got their number now, they cannot hide from me.

this is what these aholes are trying to gin up, and a race war on top:

https://www.youtube.com/watch?v=fwTT-RiMSnQ

In reply to by SWRichmond

lew1024 karenm Thu, 07/05/2018 - 19:15 Permalink

There are so many sources of contagion and chaos, I think this will devolve into a World Wide Greater Depression that will persist for many years.

The Central Banks of the world have shot their wad. The levels of malinvestment due to the easy money means each of these bubbles is harder to recover from.

The world's economies are very fragile, and paper accounting tricks are less able to recover things. For examp.e supposedly US banks are in great shape wrt capital.  But the 'mark to fantasy' accounting that replaced GAAP, Generally Accepted Accounting Principles formerly used to enforce good accounting, mean we really can't know.

The stock market is held up by companies borrowing cheap money to buy back their own stock. They buy at the market peak, cheap $, and short investment in new business. IBM has had declining revenue 3 quarters in a row as a result of their decisions to buy their own stock. Not just declining profits, as one might expect.

Positive-feedbacks everywhere.  Those destroy systems.

In reply to by karenm

wmbz Thu, 07/05/2018 - 16:32 Permalink

“Think of the federal government as a gigantic [social] insurance company with a sideline business in national defense and homeland security. This particular insurance company, it turns out, has made personal promises to its policyholders that have a current value of $20 trillion or so in excess of the revenues it expects to receive. An insurance company with cash accounting is not really an insurance company at all. It’s an accident waiting to happen.”

~Peter Fisher, fmr U.S. under secretary of the Treasury for domestic finance

francis scott … Thu, 07/05/2018 - 19:06 Permalink

In the second half of 2018, we will witness the intolerable

cumulative effects of the acts of self-serving governments

around the world as they continue to make matters worse

with the criminal economic policies that enrich their PTB.

 

Now they double down their fake diplomacy with 

contemptible foreign policies with which they cast blame for

their greedy and miscreant behavior on other, less powerful

nations. 

 

England is greatly responsible for our fucked world.  In 1776

Thomas Jefferson stated the following about England's rule of the

American Colonies and their demented desire for Absolute

Despotism in their dealings with the rest of the world. 

"But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security." 

Who here thinks this asshole nation has gotten any 

better over the last 242 years? 

Just the trolls of WHITEHALL.

 

Surely everyone here is aware that after Jefferson plainly 

stated the following about the contemptible British, they

moved themselves and their criminal behavior into Asia to 

begin selling Indian Opium to the Chinese for as much

Chinese tea as they could steal. 

 

After the Opium War with China to determine the right of the

English to sell Indian opium to the Chinese AND addict them

to it, the English fought with the Indian rebels who also wanted

them gone  --  just like every other nation the English tried to

rob of their resources, wanted them gone.  When the 'jolly' old

Brits captured any of these these rebels, they tied them to

cannons and shot 10 pound balls into their spines to watch their

heads blow 50 feet into the air.  

   

I won't bother to comment about how much death and

destruction the English are responsible for in the ME.

The final figures haven't been tallied up yet.

 

England and the USA, whom Orwell referred to as Oceania,

are ready for their close-up/comeuppances.

 

A critical mass of lies, murders, false flag assassinations,

corruption, deceit, nepotism and larceny await the evil

twins.

 

But Queen Elizabeth shits peppermint ice cream

 

England today is a nation that makes Russia under Stalin

and Germany under Hitler look like Gardens of Paradise.

 

With the exception of the USA, a greedier more evil nation

than England does not exist.