MW Here's how far the stock market and other assets have gone in pricing in a recession, according to Deutsche Bank
By Steve Goldstein
Movements in assets since 'Liberation Day' falls short of recession periods, says strategist
Financial markets have been volatile, but a comparison of how the stock market and other leading asset classes are behaving to other recession periods shows traders are not yet pricing in a recession.
That's the good, and in some way bad, news delivered by Deutsche Bank strategist Henry Allen.
"Markets clearly don't see a recession as inevitable, particularly if the tariffs don't come into force after the latest 90-day extension," he says. "But of course, the flip side is that with markets not fully pricing in a recession, that opens significant downside risks if we do get one, as none of the major asset classes have seen moves consistent with the other recessions of recent history," he says.
Stock-market futures (ES00) were rallying on Wednesday as President Donald Trump dialed back rhetoric against both China and Fed Chair Jerome Powell.
First Allen examined the stock market, with the S&P 500 SPX down as much as 18.9% from the "Liberation Day" tariff announcements. Allen points out that the maximum peak-to-trough decline in the last five recessions has been at least 19.9%, and 56.8% during the global financial crisis. In fact, even in 2022, when there were fears of a recession that didn't materialize, the S&P 500 fell over 25%.
Credit spreads - the difference in yield between corporate and Treasury bonds - also are well beneath levels seen in other recessions.
U.S. high-yield spreads JNK of 397 basis points haven't even approached non-recession scenarios, like in 2022 (583 basis points), 2016 (839 basis points) or 2011 (876 basis points), he says. In actual recessions, spreads blew out to 1,100 basis points during COVID and 1971 basis points during the global financial crisis.
Oil prices are a more complicated asset to look at since they sometimes have caused recessions by being so high. But Allen looked at periods where prices reflected a downturn, and the 10% drop in Brent crude (BRN00) since Liberation Day is nowhere near the two-thirds decline in both COVID-19 and the financial crisis.
The yield curve - in particular, the gap between the 2-year Treasury BX:TMUBMUSD02Y and the 10-year Treasury - is arguably the most recession-like, as they normally steepen into an economic contraction. "But then again, this steepening has been ongoing since mid-2023 as the soft landing became more likely," said Allen.
From here, the so-called hard data - rather than the surveys which have been bleak - will be key. "History clearly demonstrates that if we did get an actual recession, then there's still a lot of scope for risk assets to see further downside," he said.
-Steve Goldstein
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April 23, 2025 06:23 ET (10:23 GMT)
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