Unfounded Fears

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While Gross Domestic Product (GDP) continues to grow at a healthy 2% to 2.5% rate, one can still find so-called experts writing about the overleveraged consumer and how debt levels are at the highest in history.  According to these experts, another financial crisis similar to 2008 is right around the corner.  While the total debt outstanding may be at high levels, the average household debt payments as a percent of disposable personal income is at levels not seen in the past 35 years.  At the beginning of the last recession, the debt service ratio hit 13.2% of disposable income and as of March, 2017, that ratio stands at 10.0%.  In addition, more Americans have emergency funds set aside that can cover half a year’s expenses and millennials, in particular,  have been better savers than previous generations. 

household debt service ratio

On the business side, overall debt levels have increased but corporate balance sheets still remain strong. Interest coverage ratios, which measure the level of earnings to cover interest payments, remain manageable due to the low interest rate environment.  The fear of high debt levels and overleveraging at the consumer and business levels leading to a financial crisis and another recession is not justified when you consider these facts.

Economic numbers in the United States still continue to demonstrate growth despite many of the economic releases coming in below the consensus expectation.  The Citi US Economic Surprise Index which measures the positive surprises in the economic releases relative to the negative ones has declined during the last quarter.  This decline does not foretell an upcoming recession but rather shows growth expectations have become overly optimistic while the economy continues to plug along at a rate consistent with the post-recession economic expansion. 

citi us surprise index

Recessions typically occur when the economy is overheating, leading to higher inflation with the Federal Reserve aggressively raising short term interest rates in order to cool the economy.  At this point in time, the Federal Reserve has been raising rates very gradually in an effort to “normalize” short-term rates and there is no sign of overheating or rapidly rising inflation.  Barring any exogenous event that could lead to an economic slowdown or recession, this economic expansion could continue for an extended period of time.

While the U.S. economy continues its slow expansion, global economies have shown signs of life with growth in many developed countries and emerging economies exceeding expectations.  According to the World Bank, global economic growth is projected to hit a seven year high in 2018.

Equity market returns year to date have rewarded investors.  As we all know, equities do not climb up indefinitely without pause and we would not be surprised to see a brief pull back from the current levels.  The political risks still exist with uncertainty in Washington surrounding policy and tax law changes as well as the upcoming debt ceiling discussion.  These events could certainly increase volatility in the market.

We continue to see more value in equities than fixed income and our portfolios are reflective of this outlook and continue to be overweight in this asset class. International economic growth has improved and equity valuations appear favorable, leading us to put greater emphasis towards international markets.  Our fixed income portfolios continue to be slightly short on the benchmark maturity and are focused on spread product such as corporates, high yield and emerging market bonds.

In summary, despite the political circus and fears of a potential financial crisis repeat, we continue to be cautiously optimistic on the global economy and the equity markets.  We continue to monitor the economic environment and market outlook to ensure your wealth is reasonably protected.


Elizabeth S. Pierson, CFA is a Senior Vice President & Chief Investment Officer with Alpine Trust & Investment Group.

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