- July 12, 2022
-- If there is safety in numbers, then the chorus of headlines citing an imminent recession are coming from Fort Knox. We're not dismissing the potential for, or the implications of, a recession, but we think the litany of calls for the economy's demise may be too dour. For one, reliable fundamental indicators are signaling that a downturn is more probable, but not inevitable. Two, if a recession transpires, the starting point of strength and the underpinnings of economic activity suggest it could be shallow. And three, we believe markets are already pricing in a rather pessimistic outlook, suggesting investors can take a more optimistic approach. Here are some perspectives on recessions that can be useful in navigating the path ahead:Recession Stats
Is a recession coming?
- Since WWII, there have been 12 official recessions, an average of one about every six and a half years.
- Recessions have lasted an average of 10 months, though their depth and duration has varied. Excluding the pandemic in 2020, downturns in '57, '80, '90 and '01 were the shortest, all lasting eight months or less. Recessions in '73, '81 and '07 were the longest, each extending more than 15 months.
- The most mild downturns began in '69 and '01, with GDP declining less than 1%. The downturn in 1969 was prompted by simultaneous fiscal (Vietnam War deficits) and monetary (rising inflation) policy tightening, while the 2001 contraction was largely driven by a downturn in business investment (dot-com bubble burst) and the 9-11 attacks. Prior to the pandemic shutdown, the deepest recessions that saw GDP decline by more than 3% started in 1957 (tightening monetary policy), 1973 (stagflation, oil embargo) and 2007 (global financial crisis).
We think the probability of a recession has risen appreciably. While Fed rate hikes aimed at quelling high inflation have been a headwind for most of 2022, the very recent plunge in consumer confidence in response to high gasoline, food and other prices has introduced a new threat to GDP growth. The fundamental underpinnings of the economy are not heralding an imminent downturn, but we think the decline in consumer sentiment introduces some potential for a self-fulfilling prophecy if consumers worry enough to cut back dramatically on spending, which constitutes the lion's share of GDP.What does it mean for the market?
Our view of a potential recession being shallow is neither wishful thinking nor a suggestion that even a modest recession doesn't matter. Instead, we believe this will be important to the performance of the financial markets as the economic path unfolds. We think the stock market is already pricing in a high probability of a modest recession.