Wall Street Sees Recession Risk Increasing

Thoughts of a global recession continue to fill the capital markets with fear of a recession and Wall Street is beginning to echo that sentiment as the U.S.-China trade standoff continues to escalate.

“Risks remain skewed towards further escalation at least until material market or economic weakness shows,” said Morgan Stanley Chief Economist Chetan Ahya. “Continued trade tensions, combined with reactive monetary and fiscal policy, mean that the risk of non-linear tightening in financial conditions, triggering a global recession, is high and rising.”

While the tit-for-tat tariff war seemingly has no immediate end in site, investors should brace themselves for more volatility.

“With talks between the US and China dominating market moves over the near term, investors should brace for higher volatility. We believe it is prudent to take action to neutralize part of this event risk,” he wrote. “As a result, we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty.”

While tweets from the likes of U.S. President Donald Trump can certainly spend markets spinning in swift order, the economic fundamentals look balanced. In addition, some analysts foresee 2019 to end on a positive note for U.S. equities.

“Yes, these scary headlines and 3% drops on one tweet obviously aggravate everyone. But in the bigger perspective of things, things are positive,” said Ryan Detrick, Senior Market Strategist at LPL Financial.

From a technical standpoint, analysts are looking specifically at the S&P 500 for indicators of a possible recession.

“If positioning, valuation, and trade rhetoric don’t improve by the time the S&P 500 reaches 2725, we could easily see the decline in the US equity markets totaling 10-20% from the late July high,” said RBC Capital’s head of equity strategy, Lori Calvasina.. “While our base case has been for a pullback of around 10% in the months ahead, we do believe the risk of a growth scare taking hold of the US equity market is rising rapidly.”

ETFs to Consider in Volatile Market

With more volatility expected, here are some exchange-traded funds (ETFs) to consider:

  • Utilities Select Sector SPDR (NYSEArca: XLU): seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Utilities Select Sector Index. The index includes securities of companies from the following industries: electric utilities; water utilities; multi-utilities; independent power and renewable electricity producers; and gas utilities.
  • iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR): seeks to track the investment results of the Dow Jones U.S. Real Estate Index. The underlying fund measures the performance of the real estate sector of the U.S. equity market and may include large-, mid- or small-capitalization companies.
  • iShares 20+ Year Treasury Bond ETF (TLT): seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the “underlying index”). The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.

For more market trends, visit ETF Trends.