This week, the financial world’s brightest minds and most important players converged at the annual World Economic Forum in Davos, Switzerland. Normally, this forum gets plenty of attention as some of the best in business — and the top smart money managers — share their insights on where stocks and the economy are going next.
This year, this is especially true. The forum is being held on the heels of a bear market selloff, and amid global recession chatter among investors. Thus, investors are searching for clues. Do smart money managers agree with the sell-off? What about professional economists? Are they buying stocks? Selling them?
The answers are split. Everyone agrees the economy is slowing, and that risks are rising. That’s about all everyone agrees on. Some think a recession is around the corner. Others think recession talk in nonsense. Some think stocks look good here. Others are concerned.
With that in mind, let’s take a deeper look at seven smart money opinions from Davos on where stocks are going next.
Smart Money Opinion: The U.S. Economy Is a Ship That Could Slow
— Jamie Dimon, J.P. Morgan
Speaking at Davos, the widely respected CEO of J.P. Morgan (NYSE:JPM), Jamie Dimon, compared current economic conditions in the U.S. to a steady ship navigating troubled waters.
Broadly speaking, Dimon said that the U.S. economy is a ship growing at a very long-term sustainable 2% to 2.5% rate. This should continue in the absence of risks. But, risks are rising, from a China slowdown, to Brexit noise, to tightening monetary policy, to the government shutdown. The more risks there are, the more troubled the waters get, and the slower the ship will go.
Smart Money Opinion: The Economic Narrative Today Isn’t Good
— Robert Shiller, Yale University
Also speaking at Davos, Yale University professor and Nobel laureate Robert Shiller noted two things: 1) narratives drive markets, not fundamentals, and 2) the current economic narrative is not good.
Shiller believes that narratives drive the markets, citing that a sharp turn in the economic narrative preceded the 1920-21 Depression, the 1930’s Depression, and the 2008 Recession. He believes we are currently seeing a similar sharp turn in the economic narrative. Citing the same risks Dimon cited, Shiller said that the “bear market narrative has taken a strong hold”. So long as it remains in control, financial markets will presumably struggle for gains.
Smart Money Opinion: The Economy Is Slowing, But No Recession In Sight
— Steve Schwarzman, Blackstone
The message from Blackstone CEO and Chairman Steve Schwarzman in an interview with CNBC at Davos was “slower, but still good and steady”.
In a nutshell, Schwarzman notes that the economy was firing on all cylinders in 2017-18, with GDP growth up above 4% and consumer confidence at multi-year high levels. Those metrics are now pulling back. GDP growth will come down in 2019. So will consumer confidence. But, they will still above where they have been over the past 8 years, and will remain good enough to support a healthy economy going forward. He doesn’t see any recession in sight.
Smart Money Opinion: Rising Social Frictions & Too Much Debt
— Seth Klarman, Baupost Group
Seth Klarman, the well respected head of a $27 billion fund called Baupost Group, didn’t attend Davos. But, he did recently write a chilling letter warning investors about a looming recession.
Klarman’s letter has less to do with what’s going to happen today or tomorrow, and more to do with what is happening in the big picture, and what that means for the global economy going forward. In that big picture, Klarman sees “constant protests, riots, shutdowns and escalating social tensions”, the sort of things which ultimately preclude sustainable and normal economic expansion. He also highlights how every major developed economy in the world now holds a record amount of debt, and how that debt bubble could be popped by the aforementioned rising social frictions. Broadly speaking, Klarman is fairly bearish on what’s going on in the world today.
Smart Money Opinion: Significant Risk of a Recession in 2020
— Ray Dalio, Bridgewater
Ray Dalio, known as being the founder of the world’s largest hedge fund, is fairly worried about the next economic downturn, and is fairly certain that such a downturn will happen by 2020.
Speaking at Davos, Dalio said he sees “significant risk” of the U.S. economy heading into a recession in 2020. More than that, he thinks that the 2020 downturn could be especially bad, since central banks around the world do not have the resources today that they had 10 years ago to ease the pain of a recession (rates are already low, and the Fed balance sheet is already loaded up with Treasury securities). Much like Klarman, Dalio is also worried about rising social and political frictions.
Smart Money Opinion: We’re Slowing, but Still Growing
— Philipp Hildebrand, BlackRock
Philipp Hildebrand, vice chairman of BlackRock, sounded a cautiously optimistic tone at Davos. In his words, the global economy is “slowing, but… still growing”.
He characterizes the current synchronized global slowdown as a cyclical slowdown that is natural, normal, and healthy. Absent a major policy or corporate mistake, the chances of a recession this year are limited. But, he thinks that a major policy mistake — such as the Fed moving too fast — could turn this slowdown into something much worse.
Smart Money Opinion: Risks Are Rising, But No Recession Coming
— Christine Lagarde, IMF
IMF Managing Director Christine Lagarde shook the world recently when she cut her global economic growth forecast for 2019 from 3.7% to 3.5%. Her rationale? Risks are rising faster than anticipated, and they aren’t being resolved quickly.
Despite the cut in growth, she is still looking at 3.5% growth next year, and that is a very healthy read. Her opinion echoes that of Hildebrand’s, in that growth is slowing, but still good, and barring some major policy or corporate mistake, a recession is not right around the corner.
The Bottom Line From Davos
The greatest financial minds met at Davos this week, and the takeaway from the brightest in the business is clear: the global economy is experiencing a synchronized slowdown after a few years of artificially inflated growth, but no one really knows how or when this slowdown will end. Some think a recession is around the corner. Others think that growth is stable here and now.
From an investment perspective, the takeaway is also clear: stick with stocks, for now, but don’t get too excited, and remain guarded until more clarity arises on the global geopolitical scene.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.