How close is the next recession? Not very, according to James Swanson, chief investment strategist for MFS Investment Management, dismissing the first quarter’s GDP contraction as a fluke.
Swanson focused on the sustainability of the current economic cycle during the MFS midyear investment roundtable in New York on Tuesday afternoon, confirming what others, like LPL Financial Research and JPMorgan, have also recently concluded.
“I see this cycle as a sustainable, longer-term, more durable cycle,” he said, adding, “I do think this is closer to a 7- or 8-year cycle, not a 5- or 6-year cycle.”
Since World War II, the average cycle — which can range from two to 10 years — has been about five years. And, as Swanson said, the current cycle is just two weeks shy of its fifth birthday.
Something that might normally cause worries of impending recession — like the U.S. economy shrinking by 2.9% in the first quarter — Swanson questions.
“Now to me that’s sort of a mini-depression, if you will,” he said. “I haven’t seen those kinds of numbers in a long time. I thought it was pretty shocking. I just want to submit my first case here that I don’t know if it felt like a mini-depression to you or a sort of one-quarter recession, but it didn’t seem that way to me. I travel on airlines, I look at parking lots on the train on the way to work and things seem to be kind of normal, except for some bad weather.”
Swanson said that any downturn like this should have also shown a collapse in the earnings of the companies in the S&P 500 index. But it didn’t.
He added that in the same quarter that the U.S. economy saw a nearly 3% decline the S&P 500’s net margins “hit practically all-time historic highs — 9.9%, that’s with the banks; slightly less than that without the banks.”
“Something isn’t adding up that the GDP could have shrank in real terms by almost 3%, and these companies continue to pile on what I think are extraordinary profits,” Swanson said.
He added: “Profit share of GDP usually declines a year before a recession, and it only started to decline in the first quarter, and I would question those numbers.”
Swanson also expects the housing sector, which he said is still at depression levels, to “keep the momentum of the cycle elongated.”
“This is a sector that should be responding to higher house prices, and it’s not. Should be responding to the fact that since the bubble in housing we’ve added 12 million people to the economy and jobs are growing and the inventory of unsold homes is now back to or near normal, which is 5 months [of actual sales],” he said. “I think this will be the final propellant to push the economic story forward.”
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