Money & Markets - Rosenberg's Recession Alert: 'Market Is Telling You Nothing About the Economy'

February 25, 2020

Article by Chad Stone in Money & Markets

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.

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.

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.

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.

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