(Bloomberg) — Nobody knew it then, but this time last year, the rallying U.S. stock market was about to begin a plunge that would erase $5 trillion from share values and convince a lot of people a recession was at hand.
Then, as now, a trade war was raging, earnings in doubt and manufacturing losing steam. In the stock market, swings were getting violent — even as the S&P 500 was pulling itself over 2,900 and flirting with an all-time high. Fast-forward to today, and the picture bears an eerie similarity.
Two things stand out in the comparison. One, a recession never came. Forecasting the economy is hard, something the market gets wrong as often as humans. Two, shock waves from last year’s plunge are still being felt, cementing Federal Reserve Chairman Jerome Powell in his role as the main lifeline for risk assets.
“He’s on a tight rope like no other central banker has been before,” Chad Morganlander, a fund manager at Washington Crossing Advisors. “His message and his signal has been one to take a more balanced approach in the central bank’s behavior. Yes, the probability of a recession has increased, but it’s not flashing a warning light.”
It’s a message investors seem willing to accept, at least for now, and at least for as long as Trump limits his tweet tirades, amid the best two weeks of the quarter in the S&P 500. Credit the Powell Put or the fool-me-once effect, but they’re acting a little less panicked while staring into a familiar abyss. Markets gyrate, but so far every dip has been met with buyers.
Speaking in Zurich Friday, Powell said the most likely outlook for the U.S. and world economy is continued moderate growth, but the central bank was monitoring significant risks.
“We’re going to continue to watch all of these factors, and all the geopolitical things that are happening, and we’re going to continue to act as appropriate to sustain this expansion,” the chairman said. “Our main expectation is not at all that there will be a recession.”
A variety of things feed the case for a downturn, with most of the attention focused on the U.S.-China trade dispute, contractions in global manufacturing and the signal from bond markets.
On Tuesday, a key U.S. factory gauge, the Institute for Supply Management’s purchasing manager’s index, unexpectedly contracted for the first time since 2016. In the Treasury market, yields sit at half their level of a year ago and short-term rates have intermittently risen above longer ones, an inversion with a good record of signaling recessions.
At the same time, easing credit conditions, a strong consumer and unemployment near 50-year low paint a brighter picture that has lifted stocks. Data Thursday showed the services sector is expanding, hiring continues apace and durable goods are being bought. Friday’s employment report trailed forecasts in terms of jobs added but did little to suggest a recession is at hand.
“If you take a step back, you see that the economy isn’t in a terrible shape, just like a year ago,” said Candice Bangsund, portfolio manager at Fiera Capital. “What’s clear is that the central bank isn’t going anywhere and it’s going to backstop the economy.”
After gaining 1.9%, the S&P 500 ended the week roughly one big rally away from its July record of 3,025.86. The index has clocked 12 records in 2019. By this time last year it had closed at 19. While the market’s record of buoyancy is intact, predictions that the country and world are poised for big economic trouble have only gotten louder.
Ray Dalio, the billionaire founder of Bridgewater Associates, said there’s about a 25% chance of a U.S. recession this year and in 2020 and that central bankers will be limited in addressing it. DoubleLine Capital’s Jeffrey Gundlach forecasts a 40%-45% chance of recession in the next six months and 65% in the next year.
Standing against those views are the actions of the Fed, whose willingness to pump stimulus has helped push the S&P 500 up 19% in 2019. Policy makers cut rates in July for the first time in more than a decade and investors are all but certain another cut is coming this month. Traders are betting the central bank will cut rates by 50 basis points by the end of the year, with a 44% chance of an additional quarter-point cut.
“The biggest difference is the Fed,” said Arthur Hogan, chief market strategist at National Securities Corp. “As an operating body, they have changed the tone in the way they look at the world.”