Economic Insights - January 2020

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What is the outlook for the economy?  We’ll give you the insights and analysis you need to make better decisions, so you can make better profits.

In January, market participants returned from their holiday festivities with geopolitical concerns weighing on their minds.  To judge by the tone of some media coverage, the world is teetering on the brink of an apocalyptic war in the Middle East between the U.S. and Iran.

Yet week ending January 10 saw new all-time market highs.  As we’ve seen over the past ten years, trying to call the start of any pullback has been a losing strategy.

The consensus is that the U.S. economy will grow only 1.8 percent in 2020, which would be the weakest growth since 2012.  We’re not buying it. 

One of the persistent flaws in the economic thinking of many analysts and investors is that economic expansion has to come to an end because of “old age” alone.  History contradicts this widespread claim.  Research from the San Francisco Federal Reserve Bank back in 2016 shows that old economic expansions are no more likely than young expansions to die in the following year.

Instead, a common-sense view states that entrepreneurship and public policy matter the most.  For whatever reason, those issues have been ignored and dismissed. 

Common sense also tells us in such a weak recovery as we have seen since 2009, the “textbook” definition and the “models” used to forecast cycles can be tossed out the window.  Unfortunately, many still hold on to those doctrines.

As of early 2020, the big story for the economy and the market revolves around a boost in “confidence.”  As shown in a chart from the fourth quarter of 2019 Duke CFO Survey, which appears in the printable issue of Business Briefings, CFO confidence has started to improve after a big decline late in 2018.

This is just a start.  But there is plenty of room for additional improvement since more than half of CFOs still expect a recession to start in the next 12 months, which is down only slightly from third-quarter levels.

Notably, the highly reliable Business Cycle Index (or BCI) from IM Market signals, shows essentially no chance of a recession in 2020.  This model has accurately predicted...

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