Markets are searching for the next U.S. recession—the economy says not yet

The market sell-off that began on September 21 has intensified in recent days, and we’re on the cusp of a second 10% correction in 2018. While headwinds are building for the U.S. economy, there are a number of reasons why we don’t see a recession around the corner.

This level of volatility is actually quite normal for a bull market, but it’s understandably nerve-rattling after 2017’s eerily calm rise in asset prices. Since 2009, the S&P 500 Index has experienced a drop of 5.0% or more 22 other times, with an average decline in those periods of –9.3%.1 A decline of the magnitude we’ve seen in the past two months tells us that investors are starting to price in the next recession (after a nine-year expansion, it’s about time, right?). Here are four reasons why we believe they’re too early:

1. Leading economic indicators remain strong

2. Jobless claims are at historic lows

3. PMI data points to continued growth

4. Consumer confidence remains near its high for the cycle

Playing defense

Because investors are pricing in slower growth, cyclical sectors such as financials, energy, industrials, and materials have been particularly punished in 2018. However, it’s important to note that several sectors have held up quite well, especially parts of the market that offer a combination of growth and defense. Healthcare is an area we’ve favored in 2018 (tailwinds include positive demographic trends, durability of earnings, and growth at a reasonable price). While it doesn’t feel like it after the past few weeks, the technology and consumer discretionary sectors also remain in positive territory so far this year; purely defensive sectors such as utilities and real estate investment trusts (REITs) are also catching a bid. Overall, five sectors are positive and six are negative for the year, so there have been plenty of places to find refuge. 

Some sectors have offered refuge from the storm

What’s next?

In our view, the recent equity market sell-off is likely overdone, and this correction should provide a buying opportunity, as most corrections do outside of recessionary periods. Seasonality may also provide a tailwind here, as investors historically turn more optimistic at the end of the year—particularly in midterm election years. Bottom line: This bull market still has legs.