Waiting for the recession … that might not come

Following the severe correction at the end of 2018, the main equity markets rebounded spectacularly at the start of the year: the S & P500 rose by 12% and the SMI by more than 8% (as of February 12 in CHF). However, many economists expect a sharp slowdown in the global economy, or even a recession in the US by 2020. Certainly, the latest cyclical statistics are not encouraging and the long end of the yield curve went down sharply. However, there are also good reasons to stay constructive.

Indeed, the correction at the end of 2018 was mainly due to the following three elements: the Fed’s restrictive policy, the trade dispute between China and the US, and the sharp deceleration of the Chinese economy. These three elements have, or are, turning in a more positive direction. The Federal Reserve has changed its rhetoric and is pausing in its monetary normalization policy. Trade tensions are likely to subside, at least partially, as Mr Trump begins to understand that increasing tolls can be counterproductive.

Finally, China has launched a program of economic stimulus whose results will be felt in the coming months. In other words, the message the markets are giving us is that the economy is stabilising. In this context, and waiting for a recession that may not come, it may be as risky to stay in cash as to be invested.