This “Weird” Recession Signal Is Flashing Red
Think of it as the “Google fear gauge.” Recent data about Google search trends are flashing a warning sign of recession. Maybe this sort of indicator seems strange and unscientific to you, but it actually has a lot of analysts worried.
Google recently reported that global search volume for “recession” hit highs last month that haven’t been seen since the Great Recession of 2008-2009.
Wall Street has been spooked lately by the emergence of recession indicators, such as the inverted yield curve. The yield curve inversion happens when 10-year Treasury bond yields fall lower than the two-year bonds, indicating that investors lack confidence in the economy. This phenomenon has accurately predicted every downturn for the last 50 years.
That recession fear is starting to infect the sentiment of the general public. According to Google, search volume for the word recession spiked in mid-August. Using Google’s calculations, in a mere two weeks interest went from three points to 100.
Take a look at the graph:
Earlier interest in recession peaked to 100 in October 2008 and gyrated between the levels of 18 and 100 between December 2007 and May 2011.
We can’t judge the long-term historical accuracy of this indicator as a recession predictor. The numbers don’t go back further than 2004, which makes the Great Recession our only example.
However, the data provide a clue about the general public’s increasing level of financial stress. It’s yet another sign that sentiment is turning bearish.
Economists at Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM), Morgan Stanley (NYSE: MS), and Bank of America (NYSE: BAC) all predict that a recession will occur within the next 12-18 months. These economists aren’t the Chicken Little naysayers who constantly predict doom; they’re credible and they’re alarmed by the hard data.
Deutschland (nicht) über alles…
So far this year, the numbers portray a mixed-bag global economy, which in turn has generated a choppy stock market.
The news from Europe yesterday was dismal.
The European Purchasing Managers Index (PMI) released on Monday exacerbated fears about the euro zone economy. The composite PMI fell to 50.4, still indicating growth but below consensus expectations. The number marked a six-month low and a decline from 51.9 in the previous month. Any reading above 50 is considered as growth.
In Germany, the Continent’s economic growth engine, the manufacturing sector revealed a worse-than-expected contraction. The country’s manufacturing PMI fell to a reading of 41.4, well into negative growth territory and below consensus expectations for a reading of 44.
The long-running global trade war is the main factor behind Germany’s slump. Exports only account for 12% of U.S. gross domestic product but nearly 50% of Germany’s.
Another threat to Germany and the rest of the Continent is Britain’s messy preparation to exit the European Union, aka “Brexit.” The deadline for a deal is October 31 and the chances of a no-deal Brexit are growing.
British Prime Minister Boris Johnson is at war with Parliament, the Labor Party, the EU — he’s even at war with his own Conservative Party. Negotiations between Britain and the EU are bitter and they’ve gone nowhere.
The EU’s Brexit negotiator said Monday that the political gridlock over Brexit appeared unsolvable. Brexit is expected to take a serious toll on the global economy.
The United Kingdom’s Supreme Court ruled on Tuesday that Johnson’s decision to shut down Parliament in the run-up to Brexit was unlawful, throwing the process into further turmoil.
The worsening Brexit debacle combined with the latest European economic data at first sent the main U.S. stock market indices tumbling in early trading yesterday. But encouraging news from America helped stocks regain some ground. The markets closed mixed but mostly unchanged. That said, stocks remain close to all-time highs.
In an upbeat economic report Monday, IHS Markit’s PMI for U.S. manufacturing activity rose to a reading of 51 in September from 50.3 in August, exceeding the consensus expectations of economists. The figure represented a five-month high. Services PMI came in slightly weaker than expected at 50.9.
U.S. stocks opened higher Tuesday morning, as investors focused on the positive economic data in the U.S. and tuned out the negative news from Europe. However, markets plunged deeply into the red at midday, following a hawkish trade speech from President Trump at the United Nations. After the president’s remarks condemning China’s trade policies, the Dow Jones Industrial Average was down by more than 200 points.
U.S. consumers remain confident and their spending continues to drive the economy. Retails sales are robust and most economic weakness is still concentrated in the manufacturing sector, which is getting clobbered by the trade war.
But as the Google recession indicator suggests, the consumer could turn pessimistic. A trade deal remains elusive and tariffs on consumer goods are still set to take effect on December 15, right before Christmas. What’s more, the ability of the Federal Reserve to stimulate growth by lowering interest rates appears to be waning.
Investors continue to rotate toward value plays and away from growth stocks. For the past few months I’ve been advising you to make this pivot. It’s still not too late, as pricey stocks that have led the bull market lose steam and cede market leadership to value.
However, amid the great debate between growth and value, it’s possible to have both. By finding reasonably valued companies that are tapped into fast-growing trends, you can have your cake and eat it too.
Notable opportunities along those lines lie in the roll-out of 5G, the fifth generation of wireless technology. 5G involves more than just the well-known, large-cap technology and telecom companies. Our investing experts have pinpointed under-the-radar 5G plays that are poised to soar. For our special report on 5G, click here.
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John Persinos is the managing editor of Investing Daily.