Colorado has a lot to lose if recession hits, but many experts say that isn’t imminent

The Dow Jones industrial average dropped more than 780 points early on Thursday, setting the stage for a repeat of Tuesday, when it plunged 799 points. That was until buyers stepped in and shaved the loss to 79 points.

The kind of gyrations seen in the market since October, which have nearly wiped out gains for the year, are often, although not always, associated with a pending recession.

The question is an important one for Colorado’s Front Range, which has raced to the front of the pack during the long-running recovery this decade and has more to lose if it comes crashing to an end.

“You had better get used to days like the ones we have had. Volatility will increase as interest rates move higher,” Axel Merk, chief investment officer at Merk and Co., said on a webcast discussing his outlook for the markets.

Concern that the economy is slowing down is weighing on investors, who are on the lookout for slower corporate earnings growth, higher interest rates and a worsening trade war with China.

Higher interest rates are already hitting metro Denver’s housing market, which has enjoyed some of the strongest price gains in the country this decade. Prices are down from a peak reached this summer, sales are slowing sharply and the inventory of unsold homes is rising.

A reason provided for Thursday’s initial drop in the market was the arrest in Canada of Wanzhou Meng, the chief financial officer of Huawei Technologies Co., an important Chinese telecom company. U.S. officials argue Huawei is violating sanctions on Iran and they want to extradite Meng.

That did little to calm concerns that trade talks between the world’s two largest economic powers, agreed to over the weekend, were heading south before they even started.

“Did President Trump and Xi Jinping really agree to anything,” is a question many investors are asking, said Stu Hoffman, senior economist with PNC Bank, who was visiting Denver on Thursday.

Hoffman puts himself in the camp of those who believe the market downturn doesn’t forecast a recession.

The market drop, along with some softer inflation data due to falling energy prices, will give the Fed a way to back off on future rate hikes without looking like it is caving to political pressure from President Donald Trump, he said.

With domestic oil prices approaching  $50 a barrel, consumers should see big savings at the gasoline pump. Every one cent drop in the price of a gallon of gasoline translates into $9 billion in additional income for consumers, Hoffman adds.

But the price of oil is still high enough to allow U.S. producers to keep pumping, good news for Weld County and the region, he said.

Merk doesn’t see a recession next year either. Credit conditions haven’t deteriorated in the way they usually do before a recession. But unlike Hoffman, he doesn’t think the Fed will ease up on its push to contain inflation. And that could prove a problem for Denver’s housing market.

“The point of raising rates is to tighten financial conditions. The Fed is far from being done,” he said. “I am very concerned that inflationary pressures will increase.”

Colorado’s unemployment remains historically low and incomes are rising faster than inflation for the first time in years, said Richard Wobbekind, an associate professor of business economics and finance at the University of Colorado Boulder.

Economic recoveries don’t die of old age and it is hard to see what will finish off this one, he said. But it is also hard to see what will keep it from slowing next year. He doesn’t forecast a downturn until 2020. The National Association of Business Economists, a group he belongs to, has pushed its date for a national recession out to 2021.

But Sam Jones, president of All Season Financial Advisors in Denver, said the hour may be later than most people realize. He argues the market is firing off warning flares that a recession is on the horizon, one he predicts could show up in the second half of next year.

Buyers who keep stepping in and buying the dip are following the typical pattern seen in markets entering a longer-term decline. That strategy works when the major trend in the market is up. It is dangerous when the market is less stable.

“This is not a market that is ready to move higher. It has a lot of scared activity going on,” he said.

U.S. markets might still end the year up. But things should get really interesting in January or soon after when investors hesitant to realize the capital gains they have built up wait for 2019 to start selling, he predicts.

Jones advises avoiding U.S. equities, which he considers overvalued. Look for bargains overseas, where markets have suffered much larger losses. The S&P 500 is up 0.9 percent for the year, but Germany’s leading index is down 17.7 percent and Britain’s FTSE is down 14.6 percent.

He is also buying more intermediate-term bonds, for the first time in three years, in the expectation that more investors will throw in the towel on stocks and increasingly seek safety in fixed income holdings.

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