Recession Review: May 2019

Combine the old adage to "sell in May and go away" with investments based on "the January effect" and trading on monthly market calendar anomalies in 2019 would have been a solid strategy!

Anyone who reads financial news would likely have been panicked reading headlines like "second-worst May for the market since 1960's" alongside pictures of stock market traders in with horrified looks of pain and agony (or perhaps just photographed mid-yawn or post-sneeze). One might say headlines like this is an example of cherry-picking statistics at its finest but, hey, sell in May and go away right?

The stock market is noisy and volatile and sometimes that volatility lands right on convenient calendar weeks, months, quarters, and years. May was a bad month start to finish but, in the broader scheme of things, when we are looking for recession tsunamis, this is so far just a big wave with interesting timing.

Deteriorating trade talks with China and prospects for a new surprise trade skirmish with Mexico made this a month for free-trade proponents to forget. Expect this thing to drag on and continue to incentivize business to invest in alternative supply chains at the expense of profitability and, therefore, stock performance.

GDP for 2019Q1 was adjusted down from 3.2% to 3.1% (shrug) and estimates for 2019Q2 GDP from the New York Fed Staff Nowcast dropped from 2.08% to 1.48%. All things considered, 2019Q2 based on forward-looking estimates has the EMRI at +0.22, up just +0.01 from 2019Q1 discussed a month ago. While May was ugly recession-wise, the status remains almost the same - no recession folks!

The Endless Metrics Recession Indicator - May 2019

2019Q2 Outlook and What to Watch

In the second month of 2019Q2, fundamentals looked softer than April but still reasonable and not outside normal fluctuations. The jobs report on June 7th will be interesting to watch. The job engine keeps rolling despite tariffs but a negative result would start to raise the stakes.

As with last month, considering the framework of the EMRI, one would need to look for a significantly negative GDP, like a shock of -3.0% or worse. This looks unlikely given data thus far. So, a recession beginning in 2019Q2 seems very unlikely and near impossible under the constraints of the EMRI.

2019Q3 and Beyond

While the EMRI is currently designed as a coincidental indicator, it does contain several leading indicators that can provide some guidance.

In particular, as the yield curve continues to flatten and potentially invert, there is pressure on banks as shorter-term interest expense constrains margins and compromises lending. Given the scrutiny on a yield curve inversion, one might even expect some outsized panic that could accelerate the speed of a recession's arrival.

Further projections also increase uncertainty. Meaning, smaller decreases in GDP estimates or market turbulence could indicate trouble. For the coming months, look for a continued market drop following the sizeable May decline and ongoing decreasing trends in economic data. Anything below -1.0% on GDP would be a strong recession sign. So, basically, the same things one might always expect.

To venture a guess for 2019Q3 given data and trends right now - no recession. However, May data was a step in the wrong direction. At the end of June, we will get to see if the data continues to support that call!

For 2019Q4, the current flattening of the yield curve (as a forward indicator) will start to apply immense pressure. By then, even flat readings in GDP (e.g. +0.0% growth) and flat markets would indicate a recession under the EMRI framework. With market declines, even positive readings for GDP could still signal recession.

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