After a stock market rally that pushed all major indexes to all-time highs, asset management firm Legg Mason believes that there is a 50/50 shot the United States will enter a recession in the next year, according to Business Insider.
Legg Mason has around $750 billion in assets under management and believes that the recent stock market rally has contributed to the increase in the probability of a recession in the near future.
The first reason that there could be a recession is that corporate profits are weak. Investors have overlooked profits and focused more on potential growth and optimism about the U.S.-China trade war.
When smaller companies are included in the overall profitability of companies, corporate profit margins were revealed to have been flat for the past three years. There is additional pressure mounting on these companies due to rising labor costs and the trade war.
The second reason that there could be a recession is that long term interest rates dipped below short term interest rates in August. The yield curve inversion has been a prior indicator for 7 past recessions.
"Maybe the four most dangerous words in finance is 'This time is different,' because anybody that's ever uttered those words has probably lost a lot of money," Jeffrey Schulze, investment strategist at Legg Mason, said. "What we think has been happening with the Treasury market is, it's been following slower US growth and rising recession risk, and a Fed policy that's too tight."
Legg Mason is predicting that there is a 50/50 shot for a recession next year after warning signs from corporate profits and an inverted yield curve.