(Bloomberg) — Nobody knew it then, but this time last year, the rallying U.S. stock market was about to begin a plunge that would erase $5 trillion from share values and convince a lot of people a recession was at hand.
Then, as now, a trade war was raging, earnings in doubt and manufacturing losing steam. In the stock market, swings were getting violent — even as the S&P 500 was pulling itself over 2,900 and flirting with an all-time high. Fast-forward to today, and the picture bears an eerie similarity.
Two things stand out in the comparison. One, a recession never came. Forecasting the economy is hard, something the market gets wrong as often as humans. Two, shock waves from last year’s plunge are still being felt, cementing Federal Reserve Chairman Jerome Powell in his role as the main lifeline for risk assets.
“He’s on a tight rope like no other central banker has been before,” Chad Morganlander, a fund manager at Washington Crossing Advisors. “His message and his signal has been one to take a more balanced approach in the central bank’s behavior. Yes, the probability of a recession has increased, but it’s not flashing a warning light.”
It’s a message investors seem willing to accept, at least for now, and at least for as long as Trump limits his tweet tirades, amid the best two weeks of the quarter in the S&P 500. Credit the Powell Put or the fool-me-once effect, but they’re acting a little less panicked while staring into a familiar abyss. Markets gyrate, but so far every dip has been met with buyers.
Speaking in Zurich Friday, Powell said the most likely outlook for the U.S. and world economy is continued moderate growth, but the central bank was monitoring significant risks.
“We’re going to continue to watch all of these factors, and all the geopolitical things that are happening, and we’re going to continue to act as appropriate to sustain this expansion,” the chairman said. “Our main expectation is not at all that there will be a recession.”
Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade.
Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March, according to the Institute of International Finance.
The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.
“Globally, you are at worryingly high levels,” said Sonja Gibbs, managing director for global policy initiatives at the IIF. She said policy makers need to consider debt levels as they adjust interest rates. “There’s going to be an impact on the broader economy.”
In the U.K., Canada and Australia, central bankers have backtracked from rate increases in the past two years after consumers got bruised more than expected. U.S. consumers, who have borrowed to pay for college, cars and everyday spending, have been less affected because their debt burdens are much lower relative to their incomes.
“The world is in a delicate equilibrium,” said Mark Carney, governor of the Bank of England, in a February speech. “The sustainability of debt burdens depends on interest rates remaining low and global trade remaining open.”