Forecasting a recession
Each week, I monitor around 10 indicators to look for signs that the global economy is slowing, in particular the US economy.
These include auto sales, employment figures, market sentiment, the US Fed recession predictor, stockmarket movement and the yield curve, to name some.
Sometimes, specific events can cause a recession, such as the 1987 stockmarket crash, which led to a recession in New Zealand.
Typically, the warning signs appear much earlier than market tops, and escaping the bursting of bubbles, such as the 2000 "tech wreck" can be achieved by stepping off the lift when prices become irrationally exuberant and divorced from fundamentals.
There is nothing in the data which suggests a recession is imminent. In fact, it's quite the opposite; it's signalling another leg-up.
Nor is there a bubble in share prices ... bonds, perhaps. The Nasdaq has only just returned to its highs reached 17 years ago.
The fundamentals
The key drivers of this economic period remain in place:
Historically low central bank rates and quantitative easing around the world.
Low household debt service ratios.
Strong housing markets.
Positive global growth outlook.
A strong US economy.
Volatility = opportunity
Ultimately, each bout of volatility in this bull market has proven to be a buying opportunity.
Although these corrections are painful, investors must ask themselves, what has changed? What are the fundamentals telling me?
As we begin 2017, I remain positive on the outlook for equities for the year, noting two caveats. We are well into the second half of the economic cycle and bull market for equities.
Nothing lasts forever, so I'm attuned to signs for a slowdown. If the facts change, I change my mind.
Nothing can replace good stock-picking. Picking winners is your best defence in good times or bad.
Nothing can replace common-sense investing. Buy a good growth company at a reasonable price. Sell it when you think its fortunes may change.
