11th July 2019

Legg Mason: Soft patch or slowdown?

Key Takeaways

• The overall signal for the ClearBridge Recession Risk Dashboard turned yellow this month, with two indicators (ISM Manufacturing New Orders and Job Sentiment) turning yellow following the shift in Commodities to red last month.
• A yellow signal indicates caution but not the end of the cycle as the dashboard would have seen several “false positives” historically, including one in a year (1995) that appears to have several important parallels to the current environment.
• While evidence is mounting that we could be in the final stages of the current bull market, we expect equities to grind higher through increased volatility.

Soft Patch or Slowdown Leading to Recession?

The U.S. economy hit its 121st consecutive month of economic growth last week, surpassing the previous record from the 1990s. On the surface, there appear to be several positives for equity investors, including a renewed détente on the trade front, a more dovish shift for the Fed and a strong first half for stocks, with the S&P 500 up 17% (price return). This backdrop isn’t too far off from what we anticipated in our year-ahead outlook in January, though we believe that as the market begins to more narrowly focus only on the positives, a more acute awareness of risk is warranted by investors. A look beneath the surface shows several signs of deterioration that justify greater caution.

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Investments, Investment Commentary, US