24/7 Wall St.

This year has by and large been a rather nerve-racking one all around. The presidential election has taken an unprecedented and zany path, the stock market went from steady in 2015 to panic in the first weeks of 2016 and then back to joy. Economic reports also looked very ugly in the first eight weeks or so of the year, and the oil free fall was so bad that the benefits for consumers were minimized. In January and February the recession risks for the United States were picking up. Now, what feels like a rapid turn for the better, it looks as though the biggest risks for the U.S. falling back into recession in 2016 have all but vanished.

24/7 Wall St. has identified 15 reasons why the odds of a recession in the United States have moved from a “possible to likely” range down to “possible but highly unlikely.”

Before anyone gets overly excited here, the benefits in the stock market already may reflect too much exuberance. This feels just like a return to something resembling normalcy, under low-growth expectations, than it does a breakout economy. The slow growth may continue to feel very muted to many consumers, employers, investors and economists alike.

The recovery in the stock market has been one thing, but the recovery in commodities, the action in the bond market and even some glimmer of positive economic readings are all a part here. Clearly market fear and market excitement just do not always come even close to resembling the actual economic situation at any given time. Financial markets generally are supposed to be a price discovery effort for what things may be in three to 12 months out rather than just a voting proxy for a given day.

Some outsiders are getting more comfortable about a no-recession tone. Blackstone’s Byron Wein said in his March 2016 market commentary that the United States will not endure a bear market or a recession this year. Back on March 8, the key Merrill Lynch RIC Report said “The Sky Is Not Falling!” On March 11, Goldman Sachs raised its floor targets and expectations for oil for 2016 and beyond. Warren Buffett, Jamie Dimon and Lloyd Blankfein have all made statements to minimize the fears of an imminent recession as well.

In an effort to show that the recession risks are dwindling, 24/7 Wall St. tried to take a 30,000-foot view of the United States and the world using 15 points. Make no mistake, there are massive problems out there, and any one of the lowered risks could easily reverse and change the news flow. Much of the world continues to have subpar economic conditions. And averting a recession in 2016 does not at all mean that the global economy will chug along in future years — we are now seven years since the Great Recession formally ended and since the 2009 massive V-bottom in stocks.

Many issues were considered, like the Federal Reserve and outside central banks; quantitative easing (QE) versus tightening; oil, metals and commodities; the dollar and currencies; and China and other emerging markets. We also looked into the U.S. and other stock markets, bond markets and credit spreads. Geopolitical risks, the zany presidential election and even the plethora of changing economic reports were also considered. Links have been provided to many source articles, and exchange traded funds (ETFs) have been used to show more pointed recession de-risk issues.
1. U.S. Interest Rates and the Federal Reserve

The end of 2015 brought the Federal Reserve’s first fed funds rate hike in years. Federal funds went to a whopping 0.25% to 0.50% target range, more than accommodative. At the end of 2015 and the start of 2016, the Fed presidents were out in droves jawboning that the Fed was eager to raise rates to a level of normalization. There was even a telegraph of four rate hikes coming for 2016. Then the international markets hit the skids, along with the U.S. markets, and the Europe and Japan turned on more QE. And then came the recession fears.

All of a sudden, Team Yellen has had to tone down the rhetoric, and even cited international concerns on more than one occasion. In fact, many economists now believe that the Fed’s dual mandate of proper inflation checks and full employment may have a third mandate: international financial market stability. Negative rates in Japan and Europe did the Fed’s tightening on a relative basis. Now Fed Chair Janet Yellen is telegraphing only two rate hikes for 2016, and the fed funds futures market at the CME is not even pricing in a 0.75% certainty until sometime in 2017.

2. Quantitative Easing Overseas (or Here)

Having the U.S. Federal Reserve on Hold is one thing. There are other forces at work in the global economy. Japan and Europe both are now trading with negative interest rates. They are also buying more securities and debt than what was originally expected. Europe has even moved to effectively incentivize banks to lend, in an effort to avoid or at least mitigate the notion that negative borrowing rates are nothing more than a tax on savings and a tax on bank reserves.

QE is viewed with very mixed emotions, and very mixed ratings, by economists and analysts alike. The Fed did admit that it discussed negative interest rates, but it has said on multiple occasions that negative rates are not coming to America. Yellen even questioned if it was within the confines of the Fed’s ability. Taking rates into negative territory even acted as a relative Fed rate hike here, again limiting the Fed’s ability to hike. QE to negative rates has posed asset bubble risks for three nations in Europe.

3. Oil Prices and the Oil Patch

Humans have to have water to live, but the world still needs oil and fossil fuels to operate. Oil started to slide in 2014, then fell in 2015, and fell some more, and then fell beyond normalcy. In 2016 oil went so low that benchmark West Texas Intermediate crude oil was under $30. Oil became so cheap that most nations and companies drilling would be doing so at a loss or at virtually no profits. Despite Iran coming back on line, and despite Russia and Venezuela needing to sell oil for cash regardless of the price, it seems that the larger players in OPEC may have finally blinked. Putting the U.S. frackers out of business was a real goal, which at least partially succeeded, but it does no good to drive prices down so much everyone loses.

Now, even Goldman Sachs has raised its floor for 2016 and beyond in a move that may have further marked a bottom. With oil back at $40, investors need to keep in mind that the oil business is not going back to the old normal any time soon. Oil patch workers are still being laid off and capital spending plans are still pointing lower rather than higher — even if Chevron Corp. (NYSE: CVX) declared war by committing to keeping and ultimately raising its dividend, even if it has to borrow. The other consideration that likely will not change is that oil company bankruptcies and debt defaults will continue, as too much damage was done.

4. Metals and Commodities

Metals and commodities are often used as a key barometer of the global economy. It takes metals and commodities to make everything – planes, buildings, bridges, electronics, cars, solar panels and so on. This ties very closely to energy (oil), but such is life. Steel, gold, tin and copper have all recovered. Whether it is just a money trade or asset allocation change remains up for debate, but the moves have been massive.

Even copper, which can easily be measured by the iPath Bloomberg Copper SubTR ETN (NYSEMKT: JJC) was up 8% year to date at $26.64 — but that is up just over 20% from the low of $22.04 in early January. Copper (in a duel with steel) is deemed the world’s leading indicator metal. QE and negative interest rates, plus fears of large cash bills being removed, has even driven gold to what will be a great quarter. The SPDR Gold Shares (NYSEMKT: GLD) was up almost 18% year to date as of March 18, and gold itself was back up at $1,255 per ounce.
5. The U.S. Dollar

The year 2015 was when the strength of the U.S. dollar began to crush U.S. corporate profits. The dollar’s strength was so strong that it was one of the factors keeping the Fed from hiking rates. It made a near recession for big U.S. exporters. The U.S. Dollar Index, which is the dollar versus a basket of currencies, was at 80 in 2014 and went out at the end of 2015 at roughly 100, a rise of 25%. That is back to 95 as of March 17, giving back one-fourth of the gains.

The PowerShares DB US Dollar Bullish ETF (NYSEMKT: UUP) was at $26.10 at the start of December 2015 and was at $24.58, for a 5.8% drop from the high. For raw currencies, the euro was at $1.127 early on March 18, versus a recent low of $1.052. Despite QE efforts, the Japanese yen actually has strengthened. This means that U.S. exporters of goods and services are not out of the woods yet, but they aren’t covered in more ticks than they were last year.

6. U.S. and Global Stock Markets

If investors pulled a Rip Van Winkle from December 31, 2015 and woke up on March 18, 2016, they would have though nothing changed in the world. The DJIA and S&P 500 actually turned positive on March 17, and the gains of Friday, March 18, made for five straight weeks of stock market gains. For those of us who did not get a 10-week self-induced coma, it has been a harrowing year, in which the bull market turned into six or seven weeks of straight selling, and all rallies were sold into. Then in mid-February the tide reversed from an unexpected V-bottom.

The SPDR S&P 500 ETF (NYSEMKT: SPY) closed at $204.38 on March 18, now up 0.8% year to date after a dividend payment was made. The MSCI World Index, which is 85% of large and mid-cap equity performance in 23 developed markets countries (making up 85% of the market cap in each) is tracked by the iShares MSCI World (NYSEMKT: URTH) was down 12.6% in late January and was down only 0.5% at the close of March 17. One word of caution is valuations: the S&P 500 Index is now back to being valued at just over 17.5 times forward 12-month earnings per share (EPS).

S&P issued a few positive and mixed comments this week. Excluding the energy sector drag, the S&P 500 EPS growth would be +2.1% for the fourth quarter of 2015. Of the 494 S&P 500 companies that reported earnings, some 321 have beat expectations, 74 met and 99 missed. That equates to a 65% beat rate (two points under historic). Investors do need to not ignore that the S&P 500 is now trading just over 17.5 times its forward 12-month price-to-earnings (P/E) ratio, a premium to the 15-year average.

7. U.S. Treasury Bond Market Indicators

With the Federal Reserve lowering GDP growth expectations and lowering expected fed funds rate hike expectations, longer-dated Treasury yields for the 10-year and 30-year have gone to a more tepid trading. The 10-year Treasury note was around 1.88% on March 18, but was at 2.00% briefly before the Fed dial-down. Earlier in February, that yield was under 1.60%, versus 2.27% at the end of 2015. The 30-year Treasury long bond yield was 2.68% on March 18, versus 2.75% before the Fed dial-down. It was under 2.50% back on February 11 at the bottom, versus 3.02% at the end of 2015.

If we go to the shorter-date Treasury yields, the shortest rate is the overnight rate. Fed funds are still stuck at a target rate of 0.25% to 0.50%, and as noted elsewhere the CME fed funds futures are not even willing to commit to a full 0.75% rate until sometime in mid-2017. The five-year Treasury note, generally as far out as typical banks will invest, was at 1.34% on March 18. This yield was as high as 1.53% ahead of the Fed dial-down, but this was literally under 1.10% in mid-February and was 1.76% at the end of 2015.

8. Credit Spreads, Junk Debt

Credit spreads are how much more companies or other entities have to pay over the prevailing Treasury yields to borrow money. The speculative market, junk bonds, was approaching 50-50 odds of a recession in January of 2016. Even Jeffrey Gundlach of Doubleline Capital had indicated that there was a one-third chance of recession this year. The S&P U.S. Issued High Yield Corporate Bond Index was above 113 last summer and had briefly traded under 100 on February 11, 2016, and it was up to 108 again by March 17, 2016. The SPDR Barclays Capital High Yield Bond ETF (NYSEMKT: JNK) closed at $34.54 on March 18, which put it up right at 3% year to date, and up over 10% from its 2016 low of $31.27 on February 11.

S&P showed on March 18 that the speculative credit spreads had narrowed to 760 basis points on average. That is still a massive spread, and it is so wide due to so many troubled oil and commodity credits. Note that S&P was tracking that composite spread all the way up at almost 950 basis points in mid-February, versus 750 to 800 in the end of December of 2015 and start of 2016.
9. Inflation, or Lack of Deflation

The public keeps hearing that they need to get some inflation. And the saying is that nobody knows what deflation really looks like, but they won’t like it when they see it. The Fed really wants 2.0% to 2.5% inflation. Inflation was nonexistent for all of 2015 and many Consumer Price Index (CPI) readings and other measurements of prices realized were negative. The CPI reading for December (released in January) even smelled of deflation, similar to the October deflationary reading.

With energy and most commodities in a free fall, it’s just real hard to get inflation without companies just keeping all the savings themselves. As of mid-March, after commodities have stabilized and recovered, there have now been two selective CPI readings that breached the 2.0% annualized inflation at the core. That may not be major hope, but it helps to take the negative interest rate fear off the table. It also gives a good floor for if energy prices keep rising, as this could pull all fixed-goods prices marginally higher.

10. U.S. Economic Report Trends

At the end of 2015 and well into 2016, the U.S. economic reports were getting worse, and many recessionary indicators were looking more than just close. There were really more than just six warnings signs at the end of January. Another consideration is that many of the economic readings are still weak, but a focus on better to less-weak is what stands out for the most recent trends, which are pointing to a recession being averted. Again, slow growth. The Philadelphia Fed showed a very unexpected uptick in manufacturing for March. Again, the CPI is very selectively giving 2% or so inflation readings. Household wealth is at record highs, and we have seen evidence of lower credit card debt. The number of millionaires even looks mixed but still at or close to a record.

Unemployment remains under 5%, at least at the official rate, and payrolls have continued to grow more than expected of late. Weekly jobless claims have now been under 300,000 for 54 consecutive weeks, the longest streak since 1973. The Fed lowered its growth targets minimally, but they also simultaneously halved their estimated rate hike forecasts for 2016. Even earlier in March, the Fed’s Beige Book looked and sounded more like slow and pesky growth rather than a recessionary outlook.

11. Transportation as an Indicator

Transportation is a tricky bird for the economy. All the goods that get purchased have to be shipped around the country (or the world) before they get to Joe Public. Raw materials get sent to factories overseas (or in North America), factories ship the goods out by ship or by train, then by truck at the local level. That is why Dow Theory, for industrials and/or transports is still used by many investors. The Dow Jones Transportation Index was last seen up 6% for 2016, after having been down as much as almost 15% in late January.

The iShares Transportation Average (NYSEMKT: IYT) is now up 6.2% as of March 18. The Baltic Dry Index was trading at 473 right at the start of 2016. It had fallen to about 290 by the second week of February. On March 15 it was back up to almost 400 again.

12. China

The economy in China has been living far less than up to its potential. Some investors and economists may feel like China should be lumped into emerging market trends, but China is so dominant that it was considered the world’s growth engine for many years. Now imagine when 6% or 7% GDP growth just is not enough. China has taken steps to ease its policies after the Shanghai market went into free fall. The SSE Composite Index was above 5,150 last year and hit a low of about 2,650 in late January 2016. The Deutsche X-Trackers Harvest CSI300 CHN A (NYSEMKT: ASHR) was still down over 13% at $24.16 as of March 17, but this is up almost 16% from the $20.90 low on February 11.

Economists from the International Monetary Fund (IMF) and other organizations, as well as Wall Street strategists, have all learned to brace for China growing at lower rates than its history. China’s gross domestic product grew by “only” 6.9% in 2015, and the IMF suggested that China’s GDP may rise (again, “only”) by 6.3% in 2016 and 6.0% in 2017. Now China’s leadership is suggesting that its economic targets may be next to impossible to not be reached — via new growth drivers being mixed with upgraded traditional growth drivers. Does it matter that we all think (or know) that China’s economic readings can be deemed a bit murky best? Another issue now is that the risks of a major yuan devaluation seems to have been averted, at least for now.
13. Emerging Markets

The IMF and many other economic watchers have warned that 2016 will be a year of slower growth, a theme common in this and prior reports. The difference now is that some move back toward normalcy seems to have taken place. The media are now less focused on China’s potentially collapsing growth. Russian markets have bounced. Despite ongoing corruption scandals, even Brazil seems to be less of a negative.

The iShares MSCI Emerging Markets (NYSEMKT: EEM), which is heavily dominated by China, was last seen at $34.10 on March 18, up 23% from the lows of 2016 and still up 6% year to date. The iShares MSCI Brazil Capped (NYSEMKT: EWZ) was up 28% year to date as of March 18. Even more, that ETF’s $26.45 share price on March 18 was up a whopping 53% from the 2016 low of $17.30 in January. The Vectors Russia ETF (NYSEMKT: RSX) was seen trading at $16.80 on March 18, for a gain of almost 15% so far in 2016, and up a sharper 42% from the $11.81 low in January.

14. U.S. Presidential Election Trends

The one theme that has marked this presidential election cycle, from the economic front only, is that none of the leading presidential candidates have been deemed as having the best policies for the markets and the broader economy as a whole. In January and in early February, the presidential election cycle was a total unknown. In February some of the candidates with more radical policies were influencing the markets. As of March 17, the race seems to be almost down to one candidate on each side. This means that the odds of transaction taxes and the odds of business owners and the wealthy paying north of 60% taxes is now a lower probability.

Regardless of which candidate actually wins the presidential election, getting even a hint of more certainty (or less uncertainty) is often good enough for the markets and for the economy to begin pricing things in. For better or worse, the markets prefer to only have to interpret a couple of candidates rather than many with unknown to unfriendly economic policies.

15. General Geopolitical Risks

If there is one term the financial markets and economy watchers have such a hard time factoring in and interpreting, it is geopolitical risk. This is effectively a catch-all basket that lumps in military and terrorism, governments fighting with each other, foreign issues and anything else outside of normal economics and markets. In the first weeks of 2016, the world was still reeling from the attacks in Paris and in San Bernardino, Calif. The refugee crisis in Europe was still front and center, and ISIL was a serious daily news threat. We also had a U.S. presidential field that was so crowded you could have made two football teams, with bench-warmers to boot. The fears of Iran and Russia were discussed much more, and North Korea was larger news than today. There were even higher risks of uncertainty in China and growing stress in Brazil.

The unfortunate reality is that all these geopolitical risks and threats still remain as serious and viable risks to the economy. Those risks are just less of a focus in the media right now, as there have been other issues following those events. Now the country seems more focused on the iPhone unlock fight for mass privacy issues, the higher likelihood of Trump vs. Hillary, the recovery of oil and commodities and other issues. Update: dual bomb attacks in Brussels took place on March 22, 2016.

A few things to consider in conclusion here: Stock markets already have had five weeks of gains, and as of mid-March the market valuations are feeling stretched again. Bonds have entered into a slow zone, and oil and commodities have come back but still pose many problems for the top companies. The dollar remains elevated compared with recent years. And foreign central banks and governments seem to be willing to try almost anything to not slide back into recession. Sadly, there is no free lunch in the markets, and these could all easily revert back into more gloom faster than any of us would like to think.