So what do you hear? Are you Team Yanny or Team Laurel? In case you haven’t heard, some people hear the word “Yanny,” while others hear the word Laurel in this epic division. Take a listen here and see what you hear. In the end, it comes down to how high or low of a frequency your ears can pick up. Scientists claim that most “younger ears” will hear Yanny, while “older ears” will hear Laurel.
“Much like people hear the words Yanny or Laurel, it is amazing that we all look at the same economic data and come to wildly different conclusions regarding how soon a recession is coming,” explained Ryan Detrick, LPL Research Senior Market Strategist.
Many economists are worried about the Federal Reserve (Fed) hiking rates, peak earnings profits, the yield curve flattening, bond yields popping, and crude oil up significantly over the past year. With this being the second-longest economic recovery since WWII, are we really in the ninth inning of the rally?
“Although I hear Laurel, I also hear a very strong economy. One with expanding global corporate profits, low inflation, a record-high Leading Economic Index (LEI), fiscal stimulus still coming, and broad-based market participation. We see very little chance of a recession over the next 12-18 months,” according to Detrick.
Here’s the catch: even if you know a recession is coming, would it matter? As our LPL Chart of the Day shows, looking at the last 10 recessions dating back to the 1950s*, we found the S&P 500 Index was actually higher during the recession seven times! Additionally, the max pullback during a recession came in at an average of only 17.6%, and a year after the recession ended, stocks were higher nine out of 10 times.
Economic indicators continue to look strong, and we expect double-digit stock returns when all is said and done in 2018**. We’ll worry about a recession when we start seeing the warning signs pile up. Even then, our view is that long-term investors shouldn’t panic over any potential recession-based corrections and may consider using the weakness as an opportunity.
*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
**As noted in Outlook 2018: Return of the Business Cycle, LPL Research’s S&P 500 Index total return forecast of 8–10% (including dividends), is supported by a largely stable price-to-earnings ratio (PE) of 19 and LPL Research’s earnings growth forecast of 8–10%. Earnings gains are supported by LPL Research’s expectations of better economic growth, with potential added benefit from lower corporate tax rates.
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