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Recession risk is overstated

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      By Edward J. Perkin, CFA, Chief Equity Investment Officer, Eaton Vance Management

      Note: This is the latest blog post in a series to help advisors and investors navigate the recent volatility and understand what the yield curve is saying about the U.S. economy.

      Boston - Related to the futile attempt to call cycles is the futile attempt to forecast recessions. As economist and Nobel laureate Paul Samuelson famously said, the stock market has predicted nine of the last five recessions.

      There is a glib panache with which economic pundits have come to express their recessionary outlooks. I have been guilty of this myself. It takes the following form: "Recessions occur on average every x years. It has been y years since we last had a recession. Therefore, we are due."

      By presenting the recession forecast this way, the speaker is trying to sound wise, thoughtful, evidence-based, historically grounded, and bold. In fact, the speaker is dodging the question and is unlikely to hold him/herself accountable if the recession fails to occur. They will simply roll the forecast forward, "Now we are really due for a recession. We are on borrowed time."

      The other thing that economists tend to do is predict a recession 18 months hence. It's always 18 months. Right now, that means the consensus forecast for the next recession is 2020. This is another risk-averse, not-looking-to-be-held-accountable prediction. If a recession happens in 2019, the forecaster can claim to have been off by only a few months. If it happens in 2020, they nailed it. If it happens in 2021, he/she can again claim to have been only slightly off on the timing. If it happens 2022 or later, the 2018 forecast will have long since been forgotten and a fresh 18-month recession forecast will be in place.

      According to bettors on the thinly traded betting web site, PredictIt.org, the probability of recession in 2019 is 29%. That is somewhat less than would be implied by the recent frequent mentions of the "R" word.

      Bottom line: The humble investor acknowledges what he/she doesn't know and allows for the possibility of a recession at any time while avoiding the temptation to cower in fear. This means focusing on sustainable businesses with strong balance sheets that can weather a storm and succeed in the long run.