(Bloomberg) -- Stocks generally rally two years out from a recession before declining in the final year, and it looks like the current U.S. expansion could end as soon as late 2019, according to Guggenheim Partners.
Near-term recession risk is low, but longer-term risks are rising, according to a recent report from the investment firm, which manages more than $290 billion. Returns can remain strong in 2018 but investors should prepare to turn defensive in a year's time, positioning for widening credit spreads and falling equity valuations, said authors including global chief investment officer Scott Minerd.
“In the last five comparable cycles the S&P 500 has rallied an average of 16.2 percent in the penultimate year of the expansion, before falling 3.8 percent in the final 12 months,” the authors wrote. Based on their model, the next recession will begin in late 2019 to mid-2020.
The report comes during a week of frenzied bargaining among Republicans over how to shape a tax overhaul that could end up adding a fiscal boost to U.S. economic growth just as the Federal Reserve withdraws monetary stimulus. Analysts surveyed by Bloomberg currently forecast gross domestic product to accelerate to 2.5 percent in 2018 before falling to 2.1 percent in 2019.
Guggenheim's analysis of six leading indicators including the gap between the unemployment rate and the natural rate of unemployment, the Treasury yield curve and the stance of monetary policy suggests the economy still has room to expand for about two years, they wrote. The study examined five cycles ending in the years 1970 through 2007.
“Predicting downturns is a notoriously difficult endeavor, but the fact that a variety of approaches all point to the same time frame for a recession gives us confidence in our view,” Guggenheim wrote.
To contact the reporter on this story: Cormac Mullen in Dublin at cmullen9@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Joanna Ossinger, Andrew Dunn
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