Forecasting is tough, especially about the future, runs the old joke. But the dark art of prognosticating these days is no laughing matter.
Case in point: the burning question at the moment is whether the so-called green shoots of economic recovery turning brown? It’s getting harder to answer “no” these days. It’s not clear if we’re headed for a second slump, but the risk has gone up a bit in recent weeks. The hope that the economy had at least stabilized looked increasingly persuasive over the past several months, a trend that inspired the hope that the recession might soon end.
That’s still our view, although the transition from the end of the contraction to robust economic growth threatens to be a long and rocky period, as we’ve discussed, including here. But the outlook on the economy is in continual flux. As new information arrives, strategic-minded investors adjust their forecast and perhaps their asset allocation. No wonder, then, that expected risk premiums vary through time. Unfortunately, the current view for the economy looks a bit less encouraging these days; or, if you prefer, the future is a bit more problematic relative to what looked likely from June’s vantage. In any case, the green shoots have wilted, if only slightly.