A leading economist warns market events which caused big downward swings in global stocks this year could be signaling a coming recession sooner than he anticipated.
Jim Reid, macroeconomic strategist at Deutsche Bank, says cheap oil and weakness across the banking sector, particularly in Europe, are sending fear across global markets. The volatility sent the Dow Jones Industrial Average down over 400 points on multiple occasions this year and is forcing him to rethink his already dour economic outlook.
Reid is a noted bear who predicts a major economic downturn occurring between 2017 and 2018. He says the incredibly tumultuous start to 2016 has “outbeared” even his far-from-optimistic view of future market potential, reports Business Insider.
“I can’t help but feeling ‘bear-frogged’ at the moment,” Reid said in an investors note Thursday. “This risk is that we are too attached to our original timing and that everything we thought might occur in 2017 comes a year earlier.”
An increasing amount of market indicators are signaling he could be right. The risk of corporate debt defaults is mirroring levels last seen during the financial crisis. Earnings for companies listed on the S&P 500 in 2015 are also much worse than thought, reports The Wall Street Journal. (RELATED: There’s A $29 Trillion Debt-Bomb That Has Some Investors Rattled)
S&p 500 companies earned 0.4 percent more per share than in 2014, which is the slowest growth recorded since 2009. This is their pro forma or advertised position, however, which does not always hold up to generally accepted accounting principles.
When those principles are applied, the earnings per share of S&P 500 companies actually dropped by 12.7 percent from 2014 levels. This is the largest decline and widest gap between pro forma figures since the 2008 financial crisis, according to The Wall Street Journal.
Reid believes evidence is mounting that economic fundamentals may not be as strong as many economists think. Despite the potential threats this year, Reid is holding to his original analysis that a large contraction is still a year off.
“This time last year we discussed how the next major default cycle was likely in 2017-18 and in this year’s outlook we thought we were late cycle with 2017 the likely year of the next downturn,” Reid said in Thursday’s note. “We haven’t changed our minds too much on all of this and still think we’ll scrape by this year without a global recession but that we’re not far away from one.”
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