A Surprise Recession?


  • Negative GDP among 25 worst in history.
  • European banks major source of risk.
  • Mutual funds and separate accounts went defensive last week.

"I like the serendipitous surprises of reality." - Lawrence Wright

The S&P 500 (NYSEARCA:SPY) closed the week hovering around new highs as Treasury yields dropped on the heels of data that showed first quarter GDP was considerably worse than expected, revised down to -2.9%. Treasuries and Utilities (IDU), both inputs in our models used for managing our mutual funds and separate accounts, never once believed in the economic escape velocity and rising rare meme since 2014 began. Excuses for weakness have ranged from the weather, to Russia, to fluke data. While all of these have been factors, they were known. A fun stat making the rounds on Twitter from @JLyonsFundMgmt shows that the -2.9% print on GDP is among the worst 25 quarterly prints in history, and that every single one of those prints indicated recession.

Something remains amiss in the narrative of risk, fighting the Fed, and asset markets. If 2Q GDP comes in weak, or potentially negative, that would mean the US is in a technical recession. No one seems to believe that is likely, but the action in Treasuries and the compression of the yield curve does mean some "smart money" may be betting on poor data. While unlikely, keep in mind no one ever expected 1Q GDP to be negative, let alone this negative. We are in an environment where surprises should be expected regardless of how beautiful sounding and consistent the goldilocks narrative appears to be.

Equities do not need weak US GDP though to become more volatile. Perhaps all volatility needs is a nudge from Europe. Bank stocks have given back whatever gains they had following Draghi's move to negative rates and "shock and awe" stimulus. European financials overall are meaningfully underperforming European market averages, in a way reminiscent of US financials in early 2007. Whatever it takes doesn't seem to

This article was written by

Michael A. Gayed, CFA profile picture
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