A version of this post was originally published on TKer.co
Deutsche Bank made waves on Tuesday when its economists became the first of the major Wall Street analysts to say the US economy would soon slide into recession.
“Two shocks in recent months, the war in Ukraine and the increasing dynamics of increased inflation in the USA and Europe, have prompted us to significantly lower our forecast for global growth,” said the economists at Deutsche Bank led by David Folkerts-Landau and Peter Hooper, wrote in a 68-page note to clients. “We now expect a recession in the US and a growth recession in the euro area within the next two years.”
But it reflects growing concerns about the economy, especially as the Federal Reserve is aggressively trying to cool business activity in its efforts to fight inflation. And last week’s inversion of the 2:10 yield curve — a metric with a pretty good track record of predicting recessions — only encouraged those who expected negative economic growth.
Stock market bearish scenario with bear figure in front of red decline chart.
And as TKer readers know, recessions aren’t good for stocks. The S&P 500 has fallen about 20% to 30% on average over these periods¹
Deutsche Bank sees the stock market according to the historical playbook. From the bank’s equity strategist, Binky Chadha (focus on Chadha):
We maintain our forecasts for the S&P 500 (5250) and Stoxx 600 (550) for year-end 2022; with a typical recessionary correction of 20% by the end of 2023. Our forecasts for equity demand-supply this year suggest that equities should be well supported by strong inflows, a rebound in positioning to at least slightly above neutral and buybacks, but this support should come with growth in the second half of next year ease up. We see some but limited impact on European gains from the Russia-Ukraine war and a recovery in multiples. In 2023, we expect stock markets to hold up well over the summer before the US slides into recession, and for stocks to correct by a typical 20% initially before bottoming out midway and recovering to earlier levels.
The story goes on
It can be easier for clients to swallow a 20% drop in stock prices if you call it a “correction.” But in case there’s confusion, a 20% decline is more popularly referred to as a bear market.
Reality check 🙋🏻♂️⚠️
I’m not going to tell you that a recession is unlikely, any more than I would tell you that bear markets are unlikely.
recessions happen. And big sell-offs and bear markets ensue. This is what you sign up for when you invest in the stock market.
But I caution against trying to time the market (ie trying to sell on the high end and buy on the low end). Most professionals have not even managed to do this.
Some of the biggest short-term gains in the market occur during periods of heightened volatility. So if you misjudge the market, you’ll end up missing out on important gains that can do irreparable damage to long-term returns.
And history says there’s a very short window between the top in stock prices and the onset of a recession, meaning the risk of selling too soon is high.
“Historically, the S&P has made gains up to 6 months before a recession hits,” said Andrew Garthwaite, head of global equity strategy at Credit Suisse. wrote in a note to customers on Tuesday.
Unfortunately, the information in Garthwaite’s chart is potentially tradable only if you know exactly when the recession will start. And that is practically impossible.
By the way, if you decide to time and sell the market to avoid a selloff, whether or not this is linked to a recession, make sure you have a re-entry plan. Remember, there’s a chance stocks will never fall below the price you might have sold at.
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Relevant reading by TKer:
1. These averages vary depending on how far back in history you go and how you qualify the price movements that can be associated with each recession. However you measure it, it’s all bad.
A version of this post was originally published on TKer.co
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