Rosenberg: If US Consumer Gets Spooked, We'll Get a Recession

Mon, Feb 24, 2020 - 5:48pm

David Rosenberg recently spoke with FS Insider to discuss his key investment themes and ideas for 2020. David discusses corporate debt levels, the recent decline in a number of leading indicators (see below), why the US consumer will be key in 2020, as well as his biggest call and investment idea for this year. David Rosenberg is the Chief Economist and Strategist of Rosenberg Research and Associates.

Here's what he had to say...

What is the most important thing you are watching for 2020?

"There's lots of things to talk about between coronavirus and Chinese growth and, of course, the November elections…but I think that the big question from a macro perspective for this year is whether the resilient US consumer—what I call ‘Consumerica’, which is 70% of US GDP and 20% of global GDP—will the US consumer, which has been amazingly resilient, will it stay that way?"

Are there signs that ‘Consumerica’ is beginning to falter?

"I'm getting a knot in my stomach looking at some of the leading indicators… There's no question that the labor market has held up remarkably well but the Challenger numbers showed a huge increase in layoff announcements across many cyclical sectors, including manufacturing, which had until recently been a positive news story."

challenger layoffs

"And I'm seeing a precipitous decline in hiring announcements. So layoffs are on the rise, hirings are going down. Remember, these are announcements. This is what human resource departments are doing right now to prepare for the next 12 months. So this is a good leading indicator. There's also something else called the JOLT survey—the Job Opening Labor Turnover survey, which shows you what's happening with the labor market looking under the hood into the engine. And once again, I'm noticing a very significant reduction that's going on beneath the surface. In other words, I'm starting to notice that the hiring rate is going down. I'm starting to notice that the level of job openings are really a critical barometer of labor demand has not just carved out a peak, but it's hooked down substantially over the past six months…"

JOLT survey job openings
Source: Bloomberg, Financial Sense Wealth Management

"And so when you're asking me what is one of the surprises, because I think there's a lot of complacency out there regarding the fact that there will not be a recession. And of course, there cannot be a recession without the consumer playing a role. So the prevailing view is that this resilience in the consumer that we've seen is going to be prolonged through the balance of the year. I think that thesis will be put to the test."

How does this translate to your view on the stock market?

"I actually think recession risks are elevated and, maybe for the stock market, that doesn't matter. Because the stock market really for a long time has been operating on its own dynamic, which is called this relentless share buyback cycle. The stock market is trading more like a commodity than an economic barometer [so]…that's a real tough call because there's not many periods of time in our lives where we actually had a year where corporate profits went down negative four quarters in a row, like we did last year, and finish with a 30% total return in the S&P 500. And that just shows you right there that the stock market is not telling you anything about the economy. This could be the first time ever that we actually could have an NBER defined recession where GDP does contract and as long as we have this buyback craze that takes the share count down to new 20 year lows, and gives this almost artificial feeling of strength and earnings per share—since that's what investors are buying, they're not buying dollar earnings or buying earnings per share. But when you take the share count down to a 20 year low, it's amazing how you give this inflated view of what the earnings profile really looks like, and provide support for the stock market. So the stock market is actually a tougher call in that respect because this cycle is the only cycle ever where the correlation between the S&P 500 and GDP is only 7%. Seven. It’s never been that low..."

corporate profits sp500
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

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