By Gregory
Never mind that the stock market is hitting historic highs — pay attention to profits.
Several money managers, some of whom say there will be a recession in 2020, are worried that profit levels are declining.
Profits, the lifeblood of an expanding economy and a booming stock market, are starting to run down, they note. Declining profits are often a warning sign of an imminent bear market and possibly a recession.
Weak earnings, said Richard Bernstein of Richard Bernstein Advisors, are the most important factor in the economy. “When corporate profits turn negative, corporations tend to lay people off,” he said. Bernstein added that investors should also be concerned.
“You’ve never had a bear market that didn’t occur within six months of a profit recession,” Bernstein recently wrote in a report.
Several market observers put the chance of a recession this year at about 50 percent.
Speaking at the Legg Mason 2020 Outlook conference in November 2019, ClearBridge investment strategist Jeffrey Schulze said, “We think the recession risk has been rising over the course of this year.” Now, he added, the economy leans toward recession.
Schulze’s conclusion was drawn from key economic indexes, including financial stresses, retail sales, jobless claims and inflation. They, along with receding profit margins, show the economy is leaning toward recession, he argued.
The data often lead to a recession six to nine months afterward, Schulze said. “We do think there will be a recession scare sometime in the first quarter or second quarter,” he added.
Still, Schulze said, that doesn’t guarantee one. He said that several times over the past 20 years, the economy was primed for recession, but the Fed saved the day with interest-rate cuts.
