The market bounce after December’s vicious sell-off probably stopped people talking us into a recession, according to the CEO of AGF Investments.
Kevin McCreadie told WP he feels investor confidence has weakened but that without the early 2019 rebound there was a real risk sentiment would have plummeted.
He said: “If you think about that [December] drop with equity prices almost 20% down from their high in September, you probably had some people looking around saying, ‘I don’t feel so great’. If you hadn’t had that reversal, my guess is we could have pretty well talked ourselves into a recession, certainly a recession of confidence.
“People were looking at their retirement statements, companies were thinking about their income from the drop in potential economic growth. You could easily stop spending at the margin, which is growth.
“But I think we had a good bounce. Confidence has weakened a little but not at the place where it’s dangerous yet.”
One thing US investors US will have to contend with is the fading of President Donald Trump’s corporate tax stimulus, although McCreadie said there was good revenue growth last year anyway.
He added: “The cheapest form of stimulus has always been confidence. If you feel good about something as a business owner and you think the economy is going well, you’ll invest in the next piece of equipment. If you have concerns about that, you pull back, you don’t hire people and you don’t buy things.
“That goes for the consumer too. If people are worried about some of this stuff, it will affect confidence which will also feed into growth.”
McCreadie has not moved from his outlook that equity markets will “grind higher” this year, with more volatility thrown into the mix. He urged caution, though, pointing to the fact that while the markets have retraced almost all of the ground since September, which he puts down to the Fed pausing its rate rises and the Trump administration making headway with China, the rest of the world is not doing that well.
He told WP that China is “stimulating the daylights off” to try to get some growth going again and that Europe, even without delving into the Brexit quagmire, is troubled as Germany weakens. The ECB, therefore, is also holding rates like the Fed.
“If the Fed is on hold, that tells you they are concerned about something. [Even] with an unemployment rate of 3.8%, they fear some weakness too. The markets have recovered a lot and now we have priced in a fair amount of that, how do we get it going higher from here? To my mind, you have to get some comfort from the fact Europe avoids a recession and China can re-stimulate, which keeps the US afloat.”
McCreadie believes investors from here on are going to have to “earn it”, an admittedly shameless pun on the first quarter earnings season that he believes will provide clues to his “grind higher” prediction, which should be encouraged by the US stabilising and tariffs not biting as hard.
He said: “You are going to have to grind higher but you really are going to have to see earnings not slide over - and I think that’s some of the fear. If you have a weak earnings season on the backdrop of greater issues surfacing in Europe, the markets will probably not reward that.”
One of the biggest debates within the industry right now is the recent inversion of the yield curve and whether it’s still an accurate predictor of a recession. The CEO, who took over as CEO from Blake Goldring in December, believes it is something to be worried about at some point.
He explained that as short rates rise, it simply makes the decision harder for the marginal purchaser who requires any kind of financing. If you buy a car, for example, the payment goes up, slowing growth because it changes people’s behaviour in terms of whether they buy.
The ability of the banks to earn off loans from depositors is diminished with the flattening of the curve and, therefore, it’s not worth taking the risk.
“So the credit dries up,” McCreadie said, “and you are also changing people’s buying behaviours. That’s essentially the double whammy but what really pushes it over is that credit, which is what drives the economy. If you have banks starting to tighten up standards because they are not making enough money or they fear you are heading into a recession, it further propels the slowdown.
“There will be a recession out there, this business cycle will end. We are still of the camp that it’s not the US, it’s not 2019. If it’s anywhere it’s probably Europe and it’s probably late 2019, early 2020.”