View more on these topics

Life in the cycle lane

Economic forecasters, by and large, have pretty poor track records but some have been more reliable than others.

The Economic Cycle Research Institute enjoys one of the more solid records in forecasting cyclical turning points. According to its co-founder, Lakshman Achuthan, its set of leading indicators submits “overwhelming evidence” that the US economy is tipping into a new recession. Its research speaks of “wild-fire” and “contagion” among forward-looking indicators across multiple sectors of the US economy.

This verdict, publicised towards the end of September, coincided with the end of the worst quarter for many risky markets since 2008.

Some weeks ago, we argued that a recession was largely compensated for in the price of a handful of assets – European equities being an example and rotated our portfolios accordingly.

So far this month, however, markets have shifted impressively back to risk-on mode as investor concerns about a recession have eased. This begs a tricky question, namely, are calls for a recession misguided or, with equity markets up substantially from their recent lows, are investors now being presented with the best opportunity to reduce risk we are likely to see for some while?

The S&P 500 hit its all-time-high ahead of the last recession in October of 2007. By March 2008, it had fallen 20 per cent from its peak. Yet even after Bear Stearns had failed, with the world on the cusp of recession, the market then rallied by close to 15 per cent, back to within 10 per cent of its October high. After briefly piercing its 200-day moving average to the upside, recession led the market to its ultimate low in early March 2009. This year, the S&P 500 recorded its cycle-high in early May, before dropping by a little over 20 per cent. From these lows, the market has moved strongly higher to once again within 10 per cent of its May peak, recently piercing its 200-day moving average. Sound familiar?

If ECRI proves prescient again, optically cheap equities will get even cheaper, core government bonds will get even more expensive and Albert Edwards will likely receive a knighthood.

OECD governments really cannot afford a new crisis. Nor can they afford a new recession. We continue to advocate treading carefully in these markets. We have been rewarded very quickly for tactically adding risk to our portfolios in late September. Today, we are again taking risk off the table.

Watch the leading indicators. Don’t confuse them with lagging ones. Not until the former turn upwards are we likely to turn structurally bullish.

Robin McDonald is fund manager of Cazenove’s multi-manager diversity range of funds

Recommended

5

FSA Arch cru deal fails the confidence test

Speaking at the recent Arch cru Parliamentary debate, Labour Shadow Treasury minister Chris Leslie warned the debacle has undermined people’s trust in the financial services industry. Unfortunately, it is hard to see how the FSA’s £54m compensation package does anything but erode this confidence further as investors are served up an inadequate rescue package from […]

Smart thinking

Head of marketing Greg Kingston talks to Rachael Adams about how the firm will build on its SmartSipp and meet consumer thirst for innovation

4

Four charged with £5m pension fraud

Former Association of Taxation Technicians president Andrew Meeson and three business associates have been charged with stealing £5m through a tax fraud targeting the pensions industry, according to HM Revenue & Customs. Meeson, Peter Bradley, Alison Bradley and Steven Price were all arrested last year in dawn raids carried out by HMRC investigators. The raids […]

steve_bee.jpg
2

Steve Bee: Could a mass boycott put the brakes on auto-enrolment?

As you will know if you read my last column, millions of people will be auto-enrolled into pension saving from next year. This is necessary because of the fundamental changes to the state pension system and the ending of our 50-year experiment in the UK with the state providing an earnings-related second workplace pension for […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment