Mackenzie Minute: June 29, 2018
Tim Johal, Vice President, Mackenzie North American Equities Team, shares his take on recessionary signals he’s watching and when he thinks the longest expansion cycle on record will end.
Tim Johal: Increasingly we are being asked if we are nearing the end of the economic expansion cycle in the United States. It’s a good question, considering that this is one of the longest economic expansion cycles on record. We are in our 109th month of expansion in this cycle; meanwhile your typical or average expansion cycle is only 59 months. The economic cycle is important to equity markets given that we know that profits tend to peak with recessions and not before. In addition, while the Canadian economic growth may differ from the US growth, we do believe that the next Canadian recession will be closely tied to the next US recession.
We monitor several key indicators that have historically proven to give us a strong lead time before the next recession. The good news is that none of these indicators are signaling a recession in the near term and that the next recession is probably a few years away. Each of the last five recessions, dating back to the seventies, has been preceded by an inverted yield curve. The curve lately has flattened with Fed hiking but has not yet inverted. Another good indicator that we look at are jobless claims. Initial jobless claims tend to bottom and we see a period of rising claims before the next recession and we don’t believe we have seen the bottom yet in jobless claims.
Our investment process does focus on a bottom-up stock selection strategy that looks for undervalued stocks in high quality companies. We do maintain a view at the macro environment given that it does have an effect on portfolio tilts and positioning at times, but our current investment framework supports our favourable view on the opportunities that we see in the financial services, energy and industrial sectors.