Last week, as President Trump threw more fuel at the U.S.-China trade war fire, stocks around the world sharply declined.
Does this mean the United States is heading for a recession this year?
Or, is the Fed’s recent first rate cut since 2008 enough to extend the record-long U.S. economic expansion for a few more years?
With so much uncertainty in the market, it’s hard to call.
But one person I know who has a great grasp on this stuff is Leon Wilfan.
Leon is not your usual Wall Street character. He’s a self-made, self-proven investor who has seen many bull and bear markets over his prosperous investing career.
Here’s how he responded to my questions this week:
Kathleen: Leon, does the recent escalation of the U.S.-China trade war mean that we’re on the brink of a 2019 recession?
Leon: The U.S. economy was doing well enough up to this point—its GDP growth is in the 2% to 2.5% range, which is favorable for the stock market.
However, the situation is starting to look precarious…
When the trade war kicked off a year and a half ago, it really only hit the manufacturing sector. Now we’re starting to see it bounce into the retail and service sectors, too.
If we get a 10% or more correction in the stock market, we’ll see a downturn in the service and retail sectors, which will significantly impact the overall economy… and could trigger a recession.
Kathleen: How is it possible that a stock market decline can cause a recession?
Leon: The United States today is an extremely top-heavy economy. Spending is driven by the wealthiest 5% of the population—the other 95% doesn’t have that much discretionary spending power.
So, if the market drops by 10% to 15%, the portfolios of the top 5% will decline as well. They’ll start fearing for their wealth and stop spending, which will negatively affect services and retail sales, making the recession more likely.
Kathleen: With U.S. interest rates at only 2.25%, what can the Fed do to stimulate the economy? Will interest rates sink into negative territory as they did in Europe?
Leon: I find negative interest rates scary.
They’re not able to get the real economy going… and Europe is an excellent example of that.
I worry the same situation could happen in the United States, especially if the Fed initiates a 50 or… God forbid… 100-basis point rate cut by the end of the year. The U.S. economy doesn’t warrant that right now, even though the stock market and President Trump may desire it.
At some point, the Fed must confront the stock market and say “no” to the pressure. Otherwise, they’ll be fighting the next recession with no ammunition.
Kathleen: This sounds like a dangerous dilemma. If the Fed accommodates the stock market by cutting interest rates too much, it will be terrible for the long run. And, if they hold their ground, they could trigger a market decline. It seems like there is no positive outcome. What’s an investor to do at this point?
Leon: Yes, unfortunately, it looks like the more than 10-year bull market is coming to an end.
It doesn’t necessarily mean we are facing a sharp decline as we did in 2008, but don’t expect massive gains from here on out. Most likely, we’re going to range sideways for a while.
I’ve been saying for some time that investors should hold at least 20% of their portfolios in gold stocks. They represent the best counter-cyclical asset on the market right now. Those that have been following my advice saw gains of as much as 73% in under eight months. You can read more on why gold is a great investment here.
Kathleen: Great advice as usual, Leon.
Leon: My pleasure.