So many signs, so few answers
So many signs, so few answers

There are plenty of confusing signs in financial markets lately.  Most of them center on the continuing saga in Europe. Some forecast another U.S. recession, but others argue continued slow growth appears more likely.  How does one manage these recent conflicting signals?

Although the latest round of market turbulence centers on Athens, it is not Greece that should worry investors; it is simply too small a player. Instead, the larger fallout looms from the weak links of Spain and Italy as they continue to hold the financial markets hostage. Major affected markets include U.S. and European equities, the euro, Treasuries, and a long list of commodities.  The Economic Cycle Research Institute (ECRI) and Institute for Supply Management (ISM) are at odds regarding another recession, but on the plus side, the dollar is strengthening and bringing U.S. fuel prices down.  This is an unusual turn of events as we enter the summer driving season.

Much of Europe is now in recession as the U.S. market expands, albeit at a snail’s pace. Although Greece’s impending exit from the eurozone grabs the headlines, the countries to watch are Spain and Italy. In particular, undercapitalized banks in Spain could lead to major turbulence that ripples into Italy and swamps Germany’s ability to hold things together on the continent.
U.S. equities have thus far avoided much of the downdraft from Europe’s recession, but expect major reactions if the European Central Bank (ECB) is forced to step in regarding Spain and Italy.  For the most part, major central banks have likely decided to forego any more “too big to fail” bailouts ala Lehman Brothers. Expect the Federal Reserve to closely monitor this situation.
Is the U.S. Facing Another Recession?
The well respected Economic Cycle Research Institute (ECRI) reiterates its earlier call for a coming recession. The organization bills itself as the world’s leading authority on business cycles and first called for a recession last September, repeated the warning in March, and now continues to insist we are heading in that downward direction.
Weak real income growth (jobs) is the primary reason for the ECRI’s gloomy perspective. Currently, real year-over-year growth in personal income is below where income stood at the start of every recession for the past 40 years. The institute has a solid track record, so their warning is not to be taken lightly. Although a modern low of 1.71% on the 10-year Treasury sends a foreboding signal, continued slow growth remains a more likely path.
For example, manufacturing, as measured by the Institute for Supply Management (ISM), is still expanding. The latest ISM survey is nowhere near recession territory.  Over the last 35 years, there have been zero instances of a near term recession at the current level and when the ISM was trending upward.