Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 296

Would a recession in 2019 matter to financial markets?

With the S&P 500 Index delivering its worst December performance since 1931 and credit spreads widening back to their long-term averages, fears of a recession in 2019 have increased.

But are those fears justified?

Some market-based metrics have been quietly signaling an increase in the risk of recession, with one of the more popular being the flattening US yield curve. While not perfect — and market watchers need to be cautious about false positive signals, such as in the late 1960s (see illustration below) — the predictive powers of the yield curve historically have been quite high. So how should investors think about this?

I think about it in two ways.

1. Would a recession matter to financial markets?

Market falls and recessions have coincided more often than not, as we observed in 1982, 2001 and 2008. So the answer is yes. However, that has not always been the case.

Economic health — or the lack thereof — and investor sentiment are two different things. While the economy is made up of many varying elements, financial markets reflect investors’ expectations regarding profits and cash flows. While each can heavily influence or lead the other, we have observed periods in which capital market declines and recessions have been mutually exclusive, like in 1990 (a recessionary non-bear market) or in 1987 (a non-recessionary bear market).

2. This economic cycle has been different from others in many ways.

As MFS chief economist Erik Weisman recently said to me, “In terms of the traditional drivers of recession, most aren’t evident today. We haven’t just ended a war; there is no negative supply shock (as with oil in 1973 and 1979); and the US Federal Reserve isn’t aggressively trying to contain overly high inflation (like the Volker Fed in the early 1980s). Outside of corporate leverage, macro excesses in the US economy are hard to identify.”

Something else that makes this cycle different has been the rise of internet platforms. They have provided a new way for enterprise and consumers to optimize business operations and everyday life. They have fostered “de-materialization.” In other words, the world is doing more with less capital, and that has been disinflationary.

For example, cloud computing allows enterprises to better engage with customers in a more cost-effective and productive manner. Internet infrastructure technology has allowed enterprises to better manage inventories and deploy capital more efficiently. Similarly, consumers have de-materialized. Internet platforms have allowed people to rent what they once owned, avoiding large, upfront costs in categories such as shelter and transportation.

Not only in the United States, but also in Germany and the United Kingdom, consumers allocate more than half of their discretionary spending to experiences or intangibles rather than physical goods. We are seeing similar trends in emerging markets such as India and Colombia.

The result has been a decline in the volatility of real demand, which partially explains why this business cycle has been low in growth, long in duration and with fewer excesses compared with history.

In conclusion, we are generally not concerned about a recession in 2019. To me, the Treasury market, which has rallied in recent months, is signaling greater concern about a potential Fed policy error than about an overheating economy. However, we have grown concerned about market complacency surrounding margin sustainability and financial leverage. So while we are less concerned with recession risks, we believe investors should be more thoughtful about how portfolio risk is allocated today as compared to how it was in the past decade.

 

Robert M. Almeida is a Global Investment Strategist at MFS Investment Management. The comments, opinions and analysis are for general information purposes only and are not investment advice or a complete analysis of every material fact regarding any investment. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors. This article is issued in Australia by MFS International Australia Pty Ltd (ABN 68 607 579 537, AFSL 485343), a sponsor of Cuffelinks.

For more articles and papers from MFS, please click here.

RELATED ARTICLES

Investors need to allow for future cycles

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.