A number of people have forwarded this Bloomberg article – Wall Street Banks Warn Downturn Is Coming –  to me over the last couple of days. That fact alone is probably a good argument to ignore it but I can’t help but read articles like this if for no other reason than to know what the crowd is thinking. 

The gist of the article is that a bunch of sell side analysts think we are nearing the end of the current business cycle and that has them worried about stocks and credit. If that is true – that we are nearing the end of the cycle – then it is certainly reason for concern. The biggest stock market losses are generally associated with the onset of recession, although not always. For instance, in the last recession the onset of recession was December of 2007 and the stock market peaked in November. The previous recession started, officially, in March of 2001 but anyone who waited that long took a pretty big hit on his stock portfolio. The S&P 500 peaked in March of 2000, a full year before the recession, and was down 25% by March of 2001. So, maybe we need to look at what these sell side analysts are saying and see if it makes any sense.

The first thing to realize is that the dating of recessions is somewhat arbitrary. When we see those gray areas on the FRED charts indicating recession, those dates are ones chosen by the NBER Business Cycle Dating Committee. Here’s how they define recession:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Furthermore, the dating of the recession by the NBER is done with the full benefit of hindsight. The last recession, which started in late 2007, wasn’t announced by the NBER until December of 2008 after the worst of the crisis was over. The 2001 recession wasn’t announced until November 2001. So, if you are going to use the onset of recession as a stock market indicator, you better have something to base it on other than the judgment of the NBER. The point being that what the sell side guys are trying to do is worthy. Whether the things they cite as warnings are of any use is a different story. 

When you look at the quotes in the article from these banks – who all missed the onset of the last recession/bear market by the way – they don’t really say much beyond “we think this might possibly be something to worry about”. Take the Morgan Stanley quote: 

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.

His bank’s model shows assets across the world are the least correlated in almost a decade, even after U.S. stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.