The stock market has room to run and recession isn’t a near-term risk: Berenberg

  • Stock markets still have room to rise and worries of an impending recession are premature, according to Berenberg Capital Markets’ chief economist.
  • Despite the yield curve being fairly flat, Berenberg estimates “a very low probability of recession” thanks to the broad-based momentum of current economic growth.
  • While many market analysts view the current environment for stocks as late-cycle, Levy described it as characteristically similar to “middle stages of prior cycles”
Bull market volatility
Gopixa | Getty Images

There’s still room for stock markets to rise and worries of an impending recession are premature, according to Berenberg Capital Markets’ chief economist.

“Even if profits peaked in (the first quarter of) 2018, which remains uncertain, history suggests the stock market has room to appreciate,” Mickey Levy, Berenberg’s chief Americas and Asia economist, said in a client note this week. He pointed to data demonstrating how in every economic expansion since the mid-1970s, the S&P 500 index went on to appreciate for a “significant period” after corporate profits peaked.

While many market analysts view the current environment for stocks as late-cycle, Levy described it as characteristically similar to “middle stages of prior cycles” — which might not be as evident, he said, due to its fairly stretched-out duration.

“Troublesome imbalances in the real economy or financial sector that emerged during all end-stage cycles are not apparent, and aggregate demand is accelerating, stimulated by monetary and fiscal policies,” Levy said.

And despite the yield curve being fairly flat, Berenberg estimates “a very low probability of recession” thanks to the broad-based momentum of current economic growth. A flattening yield curve typically triggers worries that a recession is on the horizon, since higher short-term bond yields suggest that inflation and interest rates are expected to remain low for a longer period.Berenberg’s reassuring forecast contradicts several more bearish calls pointing to highly valued stocks as indications of an asset bubble that’s waiting to pop.

One of these came from Centricus Asset Management Fund Manager Ralph Jainz, who cast doubt on the strength of the market's bull run, saying, “Nobody wants to talk about this being a bubble. It's the greatest asset inflation bubble we have seen in 20 years."

Meanwhile, investing titan Mark Mobius recently predicted an impending correction of up to 30 percent, while billionaire investor Jim Mellon of Burnbrae Group similarly forecast a significant correction.

Pointing to the Dow Jones’ downward moves in recent weeks, Mellon warned, “We're almost flat on the year — this is the beginning of a serious correction in my opinion."

But market consensus is hard to come by, and even the most seasoned veterans of finance have gotten it wrong. Still, Levy admits that risks persist in many areas. “The probability of recession will almost certainly rise in coming years,” he said, but added that speculation on the timing of a recession based on recent trends is “uninstructive.”

Essentially, he said, stop hanging on every forecast expecting a crystal-ball answer on the future of the markets, because developing a clear picture will simply require closer analysis over time.