An investment chief overseeing $160 billion explains why traders shouldn’t worry about a recession right now

Reuters / Brendan McDermid

The market volatility seen this week is nothing to worry about, according to Brad McMillan, chief investment officer for Commonwealth Financial Network.
Until a recession is on the short term horizon, most investors have nothing to fear, he said.
McMillan also argued that even though some recession indicators have flashed recently, they’re indicating a slowdown two years into the future.
Underlying economic data in the US looks good right now, he said.
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Markets whiplashed and sent investors’ heads spinning this week amid escalating trade-war tensions that later cooled, worries of a broad global economic slowdown, and news of unrest in Hong Kong.

But Brad McMillan — chief investment officer for Commonwealth Financial Network, which oversees $160 billion — says the choppiness is nothing to worry about.

"I think what we’re seeing this week is a perfectly normal reaction," he told Markets Insider in an interview.

McMillan was referring at least partially to the market’s sharp reaction to a rare inversion of a key part of the yield curve on Wednesday. The spread between two- and 10-year Treasurys edged into negative territory, sparking fear because it’s a trusted indicator that’s preceded each of the past seven recessions. The inversion righted itself on Thursday, calming some fears of impending trouble, but adding to price swings overall.

"As long as the headlines keep justifying it, we’re going to see the market react and that’s actually a healthy thing because that’s what the market should be doing," McMillan said.

His reading of the latest yield-curve inversion is that it confirmed what the market already knows: that there’s likely to be a recession in the next couple of years. He argues that the timeline is far enough out on the horizon that investors don’t need to be worried about it right now. Even if there is a market downturn, it will be short lived in the absence of a recession, according to McMillan.

"For our investors, I’m saying unless there’s a recession coming, you don’t need to do anything," he said.

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McMillan notes that if he asked most investors about the stock-market corrections of 2015 or even 2018, most would be blank. But if he asked about the bear markets of 2000 or 2008, then clients would remember.

"What’s the difference?" he said. " The difference is that both 2000 and 2008 took place in the context of a recession."

In those cases, he says, economic deterioration was happening alongside market deterioration, which is what caused the recessions. As investors, McMillan says it’s important to watch for signs of economic deterioration — and while the yield curve is a good indicator, he said it’s not the best one because it has a lag. To see distress coming in the short term, he watches year-over-year changes in employment and consumer confidence.

When employment drops below 2 million, or consumer confidence drops below 20 points, "you’ve got a problem," he says.

Right now, neither indicator is showing signs of trouble ahead.

"The reason those matter is because if employment is growing and consumers are confident, they’re both willing and able to grow their spending," he said.

To be sure, McMillan does not consider himself contrarian to the idea that a recession may be on the horizon. He just doesn’t think that it is imminent and thus cause for immediate concern.

"I have a more extended time frame," he said. "There are people who are saying we’re going into recession now and I don’t agree with that. There are people who are saying we’re never going to have a recession, and I don’t agree with that."

"I’m looking for probably mid 2020 but it’s very data dependent," he added.

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