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Great 1st Quarter! What's to Follow a Recession?

The pattern of slower domestic growth is unmistakable. GDP readings for the last three quarters have been +4.3%, +3.4% and +2.2%. A blue chip consensus estimate for the 1st Quarter of 2019 has dropped to a meager 1.3%, although the Atlanta Fed’s GDP forecast for the 1st Quarter now has moved above 2% in the last week. Most analysts expect a pickup as the year progresses, based on seasonal factors and more certainty from the Fed.

Another culprit, the inversion of the yield curve, has picked up a lot of coverage in the financial press. The yield curve “inverts” when short-term interest rates (typically measured by the 3-month T-Bill) move above the yield on the 10-year note. This occurred for the first time since 2007 on Friday March 22. An inversion is typically a harbinger of recession; however a long lead time is normally applicable. So as the quarter came to a close, the word recession was being tossed around frequently.

But we see several reasons why a recession in the US is unlikely:

1. China is stimulating its economy and now appears to be pausing its deleveraging efforts.

2. Ongoing trade negotiations with China should, eventually, produce an agreement that soothes fragile business sentiment and supports global equities.

3. Last, but not least, the dovish Fed. We expect the US economy to stabilize over the course of this year, which should help conditions overseas as well. With interest rates still low and investor sentiment improving, risk assets continue to look good right now. With the removal of momentary stimulus European stocks are currently less attractive, but will also welcome a Sino-US trade accord.

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