David Rosenberg is an economist with a strong track record for sensing doom on the horizon, and the bond bull doesn’t like where the economy is heading in the rest of 2020.
“The stock market is telling you nothing about the economy anymore. Economic fundamentals have never mattered as little for the stock market as has been the case during this 11-year bull market.”
In 2005, Rosenberg warned of the housing bubble that began to burst a year later, and he was well ahead of others in the industry by predicting the last recession while working as Merrill Lynch’s chief North American economist for seven years.
Rosenberg, 59, now runs the show as chief economist and strategist of Rosenberg Research, and the self-described contrarian thinks the coming recession will be driven by the consumer, which remained strong throughout 2019. However, Rosenberg sees cracks forming.
“The consumer has no doubt surprised me in terms of its resilience,” Rosenberg said in a recent interview with Barron’s. “But as the legendary economist Herb Stein famously said, anything that can’t last forever won’t, and the consumer-resilience narrative is looking pretty stale to me right now.”
Rosenberg believes job creation also will slow this year, which will cause more moderate personal income growth.
“We’re already starting to see signs of wage growth subsiding in the context of a labor market that still appears to be quite tight. But the truth is always in the price. If this was truly a vibrant labor market, wage growth would be accelerating at this point — not showing signs of deceleration,” he explained. “On top of that, a broader unemployment rate — which includes discouraged job seekers and part-timers seeking full-time work — has bottomed and is starting to hook up.”
Unemployment may be floating around 50-year lows, but the quality of work isn’t on the high end.
“The principal source of this participation increase is really coming from unskilled workers going into low-valued-added, low-productivity sectors of the economy like retail and customer service,” Rosenberg said.
And he thinks the stock market isn’t a good gauge of economic activity because it’s disconnected from the economy overall.
“What has made this cycle unique is that the correlation between gross domestic product growth and the direction of the S&P 500 index has only been 7%. Historically, it has been 30% to 70%,” Rosenberg warned. “The stock market is telling you nothing about the economy anymore. Economic fundamentals have never mattered as little for the stock market as has been the case during this 11-year bull market. The stock market is behaving more like a commodity than anything else, in that it’s trading on simple supply and demand.”
What’s causing this new trend in the stock market? Quantitative easing from the Federal Reserve in tandem with massive stock buybacks, Rosenberg argues.
“It’s perfect symmetry. We have had $4 trillion of quantitative easing matched perfectly by $4 trillion of corporate share buybacks, to the point where the share count of the S&P 500 is down to its lowest point in two decades,” Rosenberg said.
“We have never before seen such a stock market performance in the face of what has been in the last 11 years the weakest economic expansion of all time. We haven’t even had one year of 3% or better real GDP growth in the U.S. since 2005.”
The markets showed some of their fragility Monday when U.S. indices tanked across the board, mostly because of uncertainty surrounding containment of the coronavirus outbreak. The Dow Jones Industrial Average lost over 1,000 points for its third-worst day in history, and the S&P 500 dropped over 3%.
The chief economist points to the market choke in December 2018 as another example of that fragility.
“To think that all it took was a 2.5% fed-funds rate to cause the corporate bond and stock markets to choke in December 2018 is a real testament to how acute the problem is,” he said. “We are simply choking on too much debt.”
Rosenberg’s Recession Investing Suggestions
All of this means investors should be looking to get a little more defensive going forward, and he calls the aerospace and defense sector a “secular bull market” because of rising military budgets around the world. He’s also a big fan of gold “because it’s inversely correlated with interest rates,” and central banks are looking to the yellow metal for diversification.
“Gold is just like bonds, a hedge against this elongated period of trade policy and domestic election uncertainty,” he argues.
Rosenberg’s last investment suggestion is oil and gas because “you want to buy sectors that are priced to extinction, and energy can scarcely be cheaper than it is right now.”
“The oil and gas industry is priced for the whole world turning into the ‘Jetsons,’ driving electric vehicles in the next five years. I don’t think that’s going to happen,” Rosenberg said.
