US Economic Cycle and Recession Probability Update - April 2018

Summary: Equity markets are likely to volatile, but the overarching risk of a recession is not high. Volatility will arise as expensive equity markets and deteriorating liquidity conditions (rising central bank rate & decelerating M2 growth) compete with the positive effects of fiscal stimulus (tax cuts). The economy remains in its “expansion” phase per our Economic Cycle model, and the probability of recession remains modest. We recommend investors remain long equities, be prepared to buy dips, minimize the use of leverage and seek portfolio protection via derivatives where possible.

In order to begin to become negative on risk assets such as equities, we are looking for the “late cycle” conditions to become prevalent on our Economic Cycle chart, alongside a rising in the Recession Probability to the 70% market. At such a time, we will begin to recommend selling risk assets and moving to cash.

The economic cycle is showing continued Economic Expansion phase conditions. Our thesis of a “second wind” for the US economic remains in play.

Recession probability remains largely unchanged from 37% in the prior quarter. In the past, recessions have occurred with at least 70% probability of recession on our model.