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Has the US Dodged an Economic Slowdown?

Investors have flocked back to riskier assets this quarter as markets re-priced the risk of an economic slowdown in the world's second-largest economy

Dave Sekera, CFA 9 April, 2019 | 2:32PM

Wall Street, New York, United States

The idea that United States has dodged an economic slowdown has given investors renewed enthusiasm for riskier assets and forced a sell-off of safe havens. Markets plunged lower last November and December as investors were pricing in a sharp economic slowdown; consumer spending had drastically slowed and Chinese economic metrics indicated economic contraction in the world's second-largest economy. However, the markets bottomed out at the end of December after global central banks quickly dialled back on their programmes to normalise or tighten monetary policy.

Among the economic metrics released last week, nonfarm payrolls for March increased to 196,000 from the stagnant 33,000 reported in February. Investors were pleasantly surprised as the March report was higher than consensus expectations and near the top of the consensus range. At 3.8%, the unemployment rate remained near its 49-year low and wage growth grew 3.2% on a year-over-year basis, reflecting a tight labour market.

Additionally, the Trump administration said it expects to reach a new trade accord with China within the next four weeks. As investors became more comfortable that the economy will continue to chug along and looked forward to trade normalisation, risk asset prices continued to rise. The stabilisation across recent economic metrics has led to a significant improvement in the Federal Reserve Bank of Atlanta's GDP Nowcast projection for first-quarter 2019 GDP growth. The Nowcast projection has risen to 2.1% after hitting a low of only 0.2% at the beginning of March.

In the corporate bond market, the average credit spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade corporate bond market, tightened 3 basis points to +119. Yields on Treasury bonds rose by 8-9 basis points across the curve as prices on Treasury bonds fell. By the end of the week, the yield on 2-, 5-, 10-, and 30-year bonds rose to 2.34%, 2.31%, 2.50%, and 2.90%, In the equity market, the S&P 500 rose 2.06% to a level that is less than 2% away from its all-time highs.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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