The ongoing collision between developing 2019 conditions and residual 2018 peak cycle sanguinity continues to play out in conspicuous fashion. We see this across high frequency Business (& Consumer) Confidence Surveys where the prospects for slowing growth have progressively overwhelmed still solid Present Conditions. This is driving an epic capitulation in Sentiment which has now entirely retraced the ebullience associated with post-election/fiscal stimulus/record streak of accelerating growth euphoria.
Headline Small Business Optimism fell -3.2pts, marking a 5th month of decline off the August 2018 cycle high and the lowest level since November 2016. Forward Expectations again served as the epicenter of weakness, falling -10pts sequentially on the back of December’s -6pt decline as slowing growth. Political gridlock and asset price volatility shock conspired to drive the largest 2-month decline since the depths of the Eurozone crisis in 2012.
Most notably, the juxtaposition in the 2nd & 3rd charts below provide a discrete reminder around the risks to the profit/earnings cycle we’ve been highlighting for months now. Specifically, a late-cycle acceleration in wages alongside a progressive slowing in (global and local) growth and a fading fiscal impulse into peak earnings cycle comps, higher interest rates and residual strong dollar translation effects is not margin and profitability positive.
… But you already knew that. And – as we highlighted last week – with 1Q19 EPS growth estimates now negative, consensus is increasingly warming to the notion of rising earnings recession risk.
Remember, its about shifts and delta’s ….
You don’t need an actual recession to get paid on a growth slowing view, you just need the probability distribution to shift to more/less probable for the view to be tangibly reflected and ‘capture-able’ in market prices.