The consensus among economists puts the odds of a recession starting sometime in the next year at 30%, according to Bloomberg's most recent survey. No wonder the S&P 500 is deep in correction territory and flirting with an official bear market.
We think the near-term pessimism is overdone. Yes, a recession is likely on the way, but it probably has about two more years before it arrives, which means corporate earnings have plenty of room to exceed expectations in the year ahead and for equities to rebound before year-end.
Plenty of reasons suggest we are not about to have a recession that starts in 2022 or early 2023.
First, the most probable cause of the next recession is the tighter monetary policy needed to wrestle inflation under control. But, so far, monetary policy isn't tight. The Federal Reserve has raised short-term interest rates by less than one percentage point and, although it's been announced, Quantitative Tightening has yet to start. Yes, the growth in the M2 measure of the money supply has slowed recently, but the time lag between tighter money and slower economic growth should be at least twelve months.
Second, tax rates haven't gone up and are increasingly unlikely to do so anytime soon. The gradual demise of the President's Build Back Better agenda means tax rates remain at the lowered levels set by the Tax Cuts and Jobs Act, which was enacted 2018.