Economics and Strategy
No Near-Term Recession, and Stocks Could Be Attractive as Long as Fed Doesn’t Overshoot
Even though the economy is facing several headwinds, Chief Economist Aneta Markowska doesn’t think a recession is imminent. A few key reasons:
Households and businesses still have a lot of cash, which makes their demand priceand rate-inelastic in the short-term. So while the Fed was able to cool housing demand very quickly, reducing consumption and labor demand will take more time.
There are still millions of job openings and margin pressures are not intense enough yet to induce a full-blown layoff cycle. In fact, Markowska expects the national unemployment rate to decline further and to bottom at around 3.2%.
This means risks are still skewed toward higher rates and Markowska expects the Fed to front-load this tightening cycle, bringing the funds rate to a 4-4.25% range by March 2023. Rates at that level could accelerate the downward momentum in growth, and she recently reduced her ’22 and ’23 GDP forecasts to 2.2% and 0%, with a recession beginning in 2H23 and lasting five quarters.
Chief Market Strategist David Zervos believes the Fed’s hawkish recent commentary is a net positive for the economy, financial markets and Fed credibility. He also says stocks, commodities and real estate remain long-term inflation hedges, as inflation devalues debts and drives nominal asset valuations higher.
Global Head of Equity Strategy Christopher Wood is more concerned about the implications of deterioration in key measures, noting that the University of Michigan U.S. consumer sentiment index has declined further to a record low, while U.S. personal savings data has fallen to its lowest level since 2008. As savings declined, borrowing has increased, with American consumer credit soaring in both March and April by the most on record. Wood’s base case for the Federal Reserve is for the Fed to provide less hawkish guidance as the year progresses, which he would see as an implicit admission by the Fed that it will have to accept structurally higher inflation above its 2% target. If he is wrong, and the Fed continues on its current aggressive rate hiking course, Wood believes the downside for equities could exceed a 30% decline from the SPX peak. And he says the longer monetary tightening proceeds, the more likely it is to trigger significant problems in the private lending market, an area where credit growth has exploded in America since the 2008 global financial crisis.
Even amid an environment of tightening monetary policy and volatile markets, Global Equity Strategist Sean Darby says investors shouldn’t panic as the solvency and balance sheets of large cap global companies are in good health while cashflows are robust enough to survive a period of economic contraction. In his view, investors have seen the worst of the share price declines.