As we experience the first real correction in years, the talk of recession has naturally reappeared along with the doom and gloomers who are convinced this is the start of a much steeper decline.
The fears, this time, are really twofold: The first has to do with a slowdown in earnings associated with a strong dollar and declining global growth. The second is the fixed-income market, which the bears are interpreting as a sign that the economy is indeed slowing to recession speed.
As we witnessed the dollar move at lightning speed throughout the last few months, adjusting to global central bank easing and a Federal Reserve that was ready for liftoff, earnings from multinationals had to be dollar-adjusted accordingly. Sarbanes-Oxley and other regulation has made it impossible for Corporate America to do anything but revise downward. Buy why?
If you dig deep, the real concern was the continued strength of the U.S. dollar. Most of the guidance given last earnings period was directly associated with the ancillary effects of a strong dollar. In fact, when talking with purchasing managers, one will find that they had pegged a much stronger dollar for this coming earnings period. They had no choice.
So, what happens when you don't get the strength in the dollar you were expecting? Better quarterly numbers. That equates to an upside surprise for earnings. Lower input costs, no inflation, seasonal strength, growing bearish sentiment and a dollar as a tailwind? The foundation is being set for a melt-up in stocks over the course of the next few months. As far as the rest of the world is concerned, the bottom line is that if the U.S.market is strong and healthy, the rest of the world will be just fine.
Now let's take a hard look at interest rates and any suggestion that the bond market is signaling a recession. Every bond trader I know, and I know a lot of them, are telling me the signal from fixed income is recession. The story is the same, the depressed rate environment has fostered bubbles, or worse, complete financial instability.
As students of the market, it is very important to occasionally take a step back and gauge the market forces from an objective manner, something impossible to do when positions prejudice thought processes. Asking simple academic questions enables one to see the market from 30,000 feet with a much wider focus. One of those questions, in this very depressed interest-rate environment is; what if low rates are the norm? More importantly, what if the high rates we experienced in the 70s and 80s were really the aberration in rates?
From 1900 through 1959, the interest rate on a 10-year note ranged from the all-time low of 2.0 percent in 1941 to a high of 5.1 percent in 1921. That is a range from low to high of only 3.1 percent. The average rate during that period was 3.3 percent. But something happened in the 70s and 80s — maybe the dysfunction in D.C. caused by Watergate and the lingering effects? Or maybe the oil embargo created by the Organization of the Petroleum Exporting Countries, which drove world markets into a frenzy and shocked the economy, had something to do with the spike higher in rates? Whatever the reason, interest rates jumped to unprecedented levels here in the U.S.and it seemed as if the "new norm" was for a period of high sustained rates with no real end in sight. Since then, the range has been from last year's all-time low yield of just under 1.5 percent to the September 1981 all-time high of 15.3 percent. This period in rates created a range of roughly 13 percent, with the average rate during that period around 6.7 percent.
Recession signals? No, maybe low interest rates are the norm.
The reality is that this market has been counterintuitive for the last 8 years. Every fear associated with the Fed's zero interest-rate policy, quantitative easing, easy global money etc. .… did not happen. No hyperinflation. No currency debasement. And continued, albeit cyclically slower, global growth.
As traders and investors it's easy to get caught up in the noise but it's important to understand the dynamic market conditions we are experiencing. Recession? No, correction.
Commentary by Jack Bouroudjian, CEO of Index Futures Group LLC, a registered independent broker, and CIO of Index Capital Partners, a registered commodity-pool operator. He was also a three-term director of the Chicago Mercantile Exchange and founder and advisor of UCX (Universal Compute Exchange). Follow him on Twitter@JackBouroudjian.
