Risks of an overheating US economy


The countdown to a US recession has started

The US economy is strong

But is in danger of overheating

Long-term market indicators signal a recession 12-24 months away

Inflation is nearing a tipping point

Economy working
above capacity

Unemployment at
decade lows

Job openings at
decade highs

Rising wages

US Federal Reserve (Fed) indicators point to rising inflation ahead

Source: NY Fed Reserve, Bloomberg

Monetary policy needs to continue responding

Central banks acting pre-emptively to contain inflationary risk

US Fed containing pressure by:

1

Raising
interest rates

2

Selling assets from
balance sheets

Absorbing fiscal stimulus from Trump’s tax cuts also means the central bank will need to raise rates much more quickly

But tighter monetary policy raises risk of recession

Recessions kill bull markets

Source: Datastream

Even if this market cycle doesn’t end with a bang just yet, risks are rising

US valuations are expensive, suggesting returns over next 10 years will be weak

Valuations are the most important driver of long run market returns

Time to preserve capital, not chase returns

We are positioned defensively, and await better opportunities

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Topics:

  • Multi-Asset
  • Objective based investing

Important Information:
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Schroders may record and monitor telephone calls for security, training and compliance purposes.