Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 296

Would a recession in 2019 matter to financial markets?

With the S&P 500 Index delivering its worst December performance since 1931 and credit spreads widening back to their long-term averages, fears of a recession in 2019 have increased.

But are those fears justified?

Some market-based metrics have been quietly signaling an increase in the risk of recession, with one of the more popular being the flattening US yield curve. While not perfect — and market watchers need to be cautious about false positive signals, such as in the late 1960s (see illustration below) — the predictive powers of the yield curve historically have been quite high. So how should investors think about this?

I think about it in two ways.

1. Would a recession matter to financial markets?

Market falls and recessions have coincided more often than not, as we observed in 1982, 2001 and 2008. So the answer is yes. However, that has not always been the case.

Economic health — or the lack thereof — and investor sentiment are two different things. While the economy is made up of many varying elements, financial markets reflect investors’ expectations regarding profits and cash flows. While each can heavily influence or lead the other, we have observed periods in which capital market declines and recessions have been mutually exclusive, like in 1990 (a recessionary non-bear market) or in 1987 (a non-recessionary bear market).

2. This economic cycle has been different from others in many ways.

As MFS chief economist Erik Weisman recently said to me, “In terms of the traditional drivers of recession, most aren’t evident today. We haven’t just ended a war; there is no negative supply shock (as with oil in 1973 and 1979); and the US Federal Reserve isn’t aggressively trying to contain overly high inflation (like the Volker Fed in the early 1980s). Outside of corporate leverage, macro excesses in the US economy are hard to identify.”

Something else that makes this cycle different has been the rise of internet platforms. They have provided a new way for enterprise and consumers to optimize business operations and everyday life. They have fostered “de-materialization.” In other words, the world is doing more with less capital, and that has been disinflationary.

For example, cloud computing allows enterprises to better engage with customers in a more cost-effective and productive manner. Internet infrastructure technology has allowed enterprises to better manage inventories and deploy capital more efficiently. Similarly, consumers have de-materialized. Internet platforms have allowed people to rent what they once owned, avoiding large, upfront costs in categories such as shelter and transportation.

Not only in the United States, but also in Germany and the United Kingdom, consumers allocate more than half of their discretionary spending to experiences or intangibles rather than physical goods. We are seeing similar trends in emerging markets such as India and Colombia.

The result has been a decline in the volatility of real demand, which partially explains why this business cycle has been low in growth, long in duration and with fewer excesses compared with history.

In conclusion, we are generally not concerned about a recession in 2019. To me, the Treasury market, which has rallied in recent months, is signaling greater concern about a potential Fed policy error than about an overheating economy. However, we have grown concerned about market complacency surrounding margin sustainability and financial leverage. So while we are less concerned with recession risks, we believe investors should be more thoughtful about how portfolio risk is allocated today as compared to how it was in the past decade.

 

Robert M. Almeida is a Global Investment Strategist at MFS Investment Management. The comments, opinions and analysis are for general information purposes only and are not investment advice or a complete analysis of every material fact regarding any investment. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors. This article is issued in Australia by MFS International Australia Pty Ltd (ABN 68 607 579 537, AFSL 485343), a sponsor of Cuffelinks.

For more articles and papers from MFS, please click here.

RELATED ARTICLES

Investors need to allow for future cycles

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Latest Updates

Retirement

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

Shares

Boom, bubble or alarm?

After a stellar 2025 to date for equities, warning signs - from speculative froth to stretched valuations - suggest the market’s calm may be masking deeper fragilities. Strategic rebalancing feels increasingly timely.

Property

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Economy

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Shares

Is the iPhone nearing its Blackberry moment?

Blackberry clung on to the superiority of keyboards at the beginning of the touchscreen era and paid the ultimate price. Could the rise of agentic AI and a new generation of hardware do something similar to Apple?

Fixed interest

Things may finally be turning for the bond market

The bond market is quietly regaining strength. As rate cuts loom and economic growth moderates, high-quality credit and global fixed income present renewed opportunities for investors seeking income and stability. 

Shares

The wisdom of buying absurdly expensive stocks (or not!)

Companies trading at over 10x revenue now account for over 20% of the MSCI World index, levels not seen since the dotcom bubble. Can these shares create lasting value, or are they destined to unravel?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.