At a lunch for professional investors and advisors last week, Philip Orlando delivered a well-rounded argument against a U.S. recession in the near term. Economic growth may well slow down, but he doesn’t anticipate two consecutive quarters of negative gross domestic product growth until 2021 or 2022.
Orlando, senior vice president, chief equity market strategist at Federated Advisory Services in Pittsburgh pointed to a number of customary indicators to make his point. Annual wage growth sits a little north of 3% right now, short of the 4% that in his view would signal a downturn two years out. And while the yield curve (the difference between the U.S. 10- and 1-year Treasury Notes) narrowed last year, it hasn’t inverted, which is a sure sign recession is in the cards.
He also detailed historical precedents having to do with the U.S. election cycle that are less often a part of these discussions.
“Over the last 70 years … there have been 11 post-war recessions in the U.S. Not a single recession was started in the third year of the presidential election cycle,” he said. “The presidents of either party – Democrats or Republicans, everybody does it – knowing that there is a big presidential election coming up the next year, they grease the skids. They want to make sure there is enough monetary policy and fiscal policy stimulus to the system that the economy does well, that the financial markets do well. That way the voters, next year, are predisposed to vote favourably for their party. So we’ve never had a cycle of decline – a recession – in the third year.”
Canadians have seen two pre-recession peaks during the third year of a presidential term in recent years: in 1947 and 1951.
Orlando also quoted U.S. stock market numbers. “The average S&P 500 return in year three is up 21%,” he said. “That’s double the average of years one, two and four. The third year of the cycle, historically has been the most productive year in the four-year cycle. We think that’s going to happen again this year.”
Orlando did allow for the fact that political risk has to be factored into financial planning. “Robert Mueller is the ultimate black swan,” he said.
“We’re looking at March as a very important month. March 1 is the China-U.S. trade deal deadline. March 20 is the next [Federal Open Market Committee] meeting; the next set of dot plots out of the Federal Reserve. We need to see some conciliatory movement toward some sort of neutral position. And then the Brexit deadline is March 29. If we can get past March with at least two of those three – I’m saying China and the Fed in place and maybe some progress on Brexit – I think the volatility that we’ve seen in the market over the last six months or so will be behind us and we’ll be in much better shape.”