The current quarter, which ends in less than two weeks, is likely to be as good as it gets for the U.S. economy and possibly the U.S. stock market, according to growing sentiment on Wall Street.
That’s not so shocking when you consider that the economic expansion is on the verge of starting its tenth year and the U.S. bull market in stocks reached that milestone in March.
GDP growth could potentially top 4% in the second quarter, then retreat to end the year with growth between 2.8% and 3%, said Brian Nick, chief investment strategist at Nuveen, relaying the firm’s midyear outlook based on the forecast from its global investment committee. They don’t expect a recession until at least 2020 or 2021, in keeping with the consensus on Wall Street.
But it could come sooner if the Federal Reserve raises rates too aggressively or an asset bubble bursts. To date, there are no signs of either, but Nick Colas, co-founder of DataTrek Research, says worry of a “ ‘Fed mistake’ is gaining real traction,” as the spread between long-term and short-term rate curves narrows.
Fears of an Inverted Yield Curve
The spread “seems destined to go to zero in the next three to six months,” which raises fears of an inverted yield curve followed by a recession, writes Colas in a recent market note.
“Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve,” write economists Michael D. Bauer and Thomas M. Mertens, in a recent paper from the Federal Reserve Bank of San Francisco. A recession could start between 6 and 24 months later, according to the authors.
Nuveen’s Nick is less concerned about an inverted yield curve, contending that long-term rates are artificially low because of foreign buying and the Fed’s still-huge reserves of Treasuries left over from its quantitative easing policy.
His canary in the coal mine for a sharp slowdown is declining business and consumer confidence along with weak or negative guidance on second-quarter earnings calls.
The Dangers of a Trade War
A trade war could be the catalyst for such a drop in confidence, and the odds of a trade war are increasing daily in sync with President Donald Trump’s threats for additional tariffs against U.S. trading partners.
“It would take a lot to derail the expansion, but an across-the-board hike in tariffs on U.S. – China trade could do it,” writes Mark Zandi, chief economist at Moody’s Analytics, in the firm’s latest monthly outlook report.