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If This Goes Negative it Nearly Assures a Recession

CAMS Weekly View from the Corner – Week ending 10/27/2017

October 30, 2017

If you are a consistent reader of these Weekly Views you may recognize that we share numerous topics that are left “hanging out there” until a later date whereby we circle around again to see what has unfolded from the initial or on-going observation.  The general idea is to briefly share a relative snapshot from our in-house measures and observations.

Speaking to this in the late Spring season we shared an observation of an important loan category known as Commercial & Industrial Loans.  These are loans taken out by businesses and corporations to fund anything from general business expansion to extensive capital investments.  Historically, they play a notable role in underlying economic activity.

In the Spring we shared the level of this loan category and its corresponding trend was getting concerning.  Since then C&I loan growth rates have dwindled further.

Several days ago the latest results were released and they reflected the lowest growth rate levels in the last six-plus years.  This dates back to coming out of the Great Recession whereby it took a couple of years to see these reach positive year-over-year growth rates again.


The above chart depicts C&I loan growth rates for the last five years.  This reflects the percentage growth rate compared to the previous year on a rolling basis.  We are now below 2% growth whereas in our previous View for this category it was north of 2 ½%.  This speaks to the on-going withering.

Since 1950 there have been seven timeframes where this loan category went to negative growth rates and in every experience the economy was either in or leading to a recession.  There were other recessions since 1950 where C&I loan growth rates held positive but were trending down as well.

The takeaway is when trending down consistently concerns of a recession increase.  When this category goes negative recessions are a near certainty.  Through this lens it is imperative that we see this loan category pickup in strength to alleviate said concerns.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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