Fears of a US recession escalated during the fourth quarter of 2018 amid the slump in risk assets and tightening in financial conditions. Notwithstanding the Fed’s dovish pivot in response to these concerns and attendant easing in financial conditions, various tools and models still assign a c.30% probability to a US recession in 12 months’ time. Some of the experts continue to think there is a non-trivial risk that the US expansion – now 118 months old – will end in 2020. Should we worry about a US recession? In short – yes. The adage “When the US sneezes, the world catches a cold” surely still applies given integrated global supply chains and sizeable cross-border capital flows. Should we worry about it now? This is more difficult to answer. Leading indicators, such as the slope of the yield curve, have good predictive power when it comes to a US recession, but the lead-time varies greatly. Hence, investors face a potential opportunity cost of positioning too early for a downturn. Alternatively, if the US has a soft landing, then the penalty for being long risk assets may not be as significant as feared.
