Are we headed toward a recession in the near future.?

On the international and national level, the past few weeks have seen 2016 roll in, and along with it Chinese markets that tripped markets circuit breakers, tensions were rising between Iran and Saudi Arabia. North Korea claimed it has developed a hydrogen bomb. All these events helped create short-term (we hope) instability in several asset classes, notably equities and commodities.

We need to remember that in the United States December was a strong month for the labor market, adding approximately 292,000 non-farm jobs, and giving some hope that a meaningful increase in average hourly wages is on the horizon (which has been a missing piece of the economic puzzle for some time). 

With all of the recent volatility, I wanted to give you a few points to make sense of what is going on:

• Everyday investors are panicking over the most recent wave of volatility, but professional investors seem to be remaining calm for the time being.
• Three key indicators tell us a lot about the mindset of professional investors, which matters because of their dominance in the U.S. equity market.
• The market appears as if it may remain decoupled from fundamentals for the time being, but that in of itself will not shift the direction of the U.S. economy

• The volatility is no more than a continuation of what we saw last year (China, commodities, currency, etc.). It does not indicate a material shift in our economy. This is all emotionally driven volatility.
• We all need to focus on information that drives the fundamentals instead. Consumer confidence is at a high, auto sales have never been stronger (a huge deal), services data is strong in the U.S. (as recently released), unemployment is at a decade low, the Fed raised interest rates (this is a huge deal because it is a belief that our economy is getting stronger).
• There have been 8 interest rate cycles since the 1950s. On average, the S&P 500 rose for 30 months after the first rate hike in each cycle. The shortest time period of stock price gains was 10 months. On average, one year after the first rate hike, the market was up 9.5%. Past results don’t guarantee that history will repeat only that it’s usually a good sign when rates rise (initially).
• Although everyone may feel nervous and you may feel the urge to make big changes in your portfolio or go all into cash, often times it is best to stay the course. Cash only loses money (purchasing power) safely. On the other end going further up the risk curve will only expose you to more volatility and subsequently risk you selling into panic. Perhaps the best thing to do is focus on the yield that you are receiving and be patient.
• The risk of a recession remains low.