As Dow Futures Fizzle, America’s ‘Growth Recession’ May Actually Prolong the Bull Market

• Futures on the Dow and S&P 500 edge slightly lower in overnight trading.
• America’s so-called ‘growth recession’ could prolong the business cycle and make certain stocks attractive over the long haul, according to Credit Suisse.
• An extended business cycle is likely to benefit growth stocks over value plays.

Futures on the Dow Jones Industrial Average (DJIA) flat-lined in overnight trading Wednesday, as investors took a pause following a record-breaking rally at the start of the week.

Dow Futures Edge Slightly Lower

Futures on all three major U.S. indexes were mixed in overnight trading, reflecting a tepid conclusion to the New York session. Dow Jones futures edged down 13 points, or 0.1%, to 27,408.00. The contract was off 47 points earlier in the evening.

Futures on the Dow Jones Industrial Average are in need of direction Wednesday. | Chart: Bloomberg

S&P 500 futures fell 0.1% to 3,070.25. The Nasdaq mini futures contract flat-lined at 8,209.50.

Growth Recession Could Be Good for Stocks

As America’s economic expansion extends into year 11 – the longest in history – investors are beginning to worry about overvaluation risks upsetting their portfolios. According to analysts at Credit Suisse, America’s so-called ‘growth recession’ might be a good thing for stocks as it prolongs the business cycle, reduces volatility and favors some stocks over others.

Although you won’t hear about ‘growth recessions’ in classic economic textbooks, they have become the new norm in today’s world. The U.S. economy is said to be in a growth recession today because it’s expanding below trend and showing signs of decelerating. But Credit Suisse analyst Jonathan Golub says this could be a good thing for growth stocks and other segments of the financial market.

The U.S. economy has struggled to grow above 2% annually in three of the past four quarters. The growth recession extends far beyond that period.| Chart: tradingeconomics.com

In an research note to clients, Golub said:

“Our long-term view on equities is quite simple, though perhaps counter-intuitive. Slower economic growth will extend the business cycle, reduce volatility, depress interest rates (and spreads), and reward capital-light business models, resulting in a more abundant return of capital to shareholders. Such a backdrop naturally favors Low Vol and Growth stocks over Value, and the U.S. over other regions.”

He added:

“Given the shifting backdrop, we now believe investors would be well served to reposition their portfolios toward Value stocks over Low Vol and Growth, and more Cyclical groups over Defensive names.”

Just how much runway stocks have left is anyone’s guess, but analysts at Morgan Stanley believe the long-term outlook isn’t good. Although a conventional portfolio devoted to stocks and bonds is expected to yield positive results over the next decade, Morgan Stanley says your annual rate of return will barely stay ahead of inflation.

In either case, a growth recession without any major shocks should keep equity prices trekking higher in the immediate future. Although stock prices don’t always follow GDP growth, the general consensus on Wall Street is that equities still have room to extend their record highs.

Of course, all that goes out the window if the U.S. economy brakes toward actual recession or the Federal Reserve’s latest repo-market mania turns out to be a cover for a solvency crisis. That’s when investors may have to re-evaluate their portfolios.

This article was edited by Josiah Wilmoth.

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