Over the past three decades of market observation, I have noticed that market sentiment and opinions seem to go too far in both directions over the normal course of a market cycle. This is what makes markets. Just as many observers may be understating long-term potential growth, they may be overstating the degree to which activity in many economies has weakened in recent months. The selloff in risk assets over the past two months has not been mirrored in a significant deterioration in the economic data. To some extent, this may simply reflect the usual ebb and flow of markets, which often bear little resemblance to shifts in the underlying fundamentals. It may also reflect the divergence between what matters to Wall Street and what matters to Main Street.
According to Bloomberg, GDP growth forecasts are currently much higher than previous periods of weakness. Also, the Federal Reserve forecast is improving after improvement in retail sales numbers.
We have written about the rising risks of recession in the United States. While the bond market is sending signals of deteriorating credit, it is important to consider our current position in the economic cycle.