Are We Having a Recession or Not?

Most think so. Some foresee a soft landing—where the economy barely skates through. Few have no opinion. It’s one of the most important questions investors must ask because stock markets usually fall dramatically from the impact of a recession. Will we have one? We think so.

Globally, growth is waning, though at a tepid pace because of the prior avalanche of government stimulus, rebuilding of supplies, and extremely low unemployment. Will central bank restraint lead to a mere petering out of growth, if inflation is quickly perceived to have been ameliorated, or is recession inevitable from one of the fastest tightening responses on record?

Even if there is a change in perception that inflation has been tamed (which we believe should be the case), the authorities likely won’t loosen since they’ll be worried about reigniting inflation, as they did in past cycles.Therefore, while short-term administered interest rates may be close to peaking, we don’t expect declines in the near term, unless the economy experiences a harsh decline.Meanwhile, food prices remain stubbornly high, and a good portion of the recent slowdown of inflation was attributable to the dip in gasoline prices, which are now rising again since the oil market is tight.Even excluding food and energy, inflation is too high.

Gone are the days of zero-interest rates policies, and the negative rates that absurdly occurred in some jurisdictions. Yet security valuations have not sufficiently adjusted, especially considering the prospect of a recession and already declining corporate profits. And central banks certainly don’t wish to rekindle the speculative fervour that accompanied such low interest rates.

Good News Isn’t Good News

Remarkably, despite most believing a recession is imminent, investors’ attitudes could best be described as nonchalance. Perhaps because inertia is a powerful force, and most are reactive. Or while unemployment is so tame and consumers are in such good shape, most aren’t worried about its impact on themselves yet. But good news is bad news, at least economically right now, because for example, central bankers are concerned that a tight labour market (near record-low unemployment) could lead to undue wage inflation (ADP figures just showed a 7.3% annual increase and much higher for those changing jobs), and a further overall impact on prices generally, especially in services where inflation is still rising.