Mid-Quarter Economic Update

Mid-Quarter Economic Update

by Erin McMenemon on July 20, 2019 The Behavioral Investor

BCM sees the increasing possibility of a recession beginning within the next six to twelve months.

Since last year, BCM has been highlighting a number of key recession indicators on quarterly market letters, so that clients would have an idea of some of the inputs that go into BCM’s Market Risk Model.

For much of the last ten years, we have been steadfast with our view that there was no indication of a forthcoming recession, and as such, a normal investment allocation within your chosen portfolio was warranted.  However, that view started to change a bit beginning last fall.

As of right now, there are a few leading economic measures which suggest that there is a reasonable probability that a recession could begin within the next year or so.  The chart below would be one example of those leading data sets we follow and pay attention to.

Looking at the above chart it can be seen that while conditions for impending negative economic growth have not yet been fully met, there’s no denying the directional trend.

This trend warrants close attention.  If it should breach the 0 line from above, any further sustained deterioration would strongly suggest that recessionary business conditions are coming.  Since 1960, the average time from breaching zero to the onset of an economic recession has been roughly 6.5 months, with the range of times running from 2 months to 15 months.

Why Do We Care?  This matters to us because during recessionary business conditions, an allocation adjustment away from stocks towards long-term government bonds is often warranted (stocks do tend to get kicked around during recessions).

 So, Why Are We Presenting This Update Now?  Our Market Risk Model, at this time, is not yet dictating a change of allocation for our portfolios.  But market risk is a moving target that we pay close attention to.  The day will absolutely come when a risk reduction and reallocation of our portfolios will be called for.  When that day comes, we will act, and you will know that there are (many) sound reasons behind all allocation decisions we make on your behalf.  Until then (after all, we don’t forecast the forecast), we hold tight and keep a sharp lookout.


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About the Author

Erin Despot McMenemon joined Billeaud Capital Management in 2016 as an Investment Adviser Representative. Erin has 11 years of experience in valuation and financial consulting, investment banking, and private portfolio management. Erin received her Masters of Business Administration degree from the A.B Freeman School of Business at Tulane University and holds a degree in Finance from Louisiana State University… Read more.