To The Moon

Perhaps markets will also suspend recession fears when just one of a flattening yield curve, a surge in oil prices, or a correction in the stock market. Yet when all three of these things happen at the same time, there is a stronger perception that it's time to take the threat of a recession seriously.

As is the case now, jitters in stocks, bonds and commodities are forcing traders to reassess their growth expectations in real time.

Such fears may seem unfounded at a time when the U.S. economy created 678,000 jobs in just one month and few observers see a recession in the short term. But the market has always been forward-looking, and its common message cannot be ignored. The S&P 500 fell nearly 3 percent on Monday, with oil near its highest level in a decade and nickel and wheat soaring. Taken together, the information may suggest that the threat of economic austerity has begun to mount amid the outbreak of the Russian-Ukrainian war and the Fed's hawkishness.

David Donabedian, chief investment officer at CIBC Private Wealth Management, said: “It’s time to lower the growth outlook and raise the risk of recession. If oil rises to $125 or higher for six months, Europe will fall into recession because the region Very sensitive to Russian imports."

Stock, Mond, Commodity Markets Signal Recession

Right now, the specter of stagflation is emerging in the bond market. The 10-year inflation breakeven ratio has now risen to its highest level since 2005, while the yield curve (the gap between the 10-year yield and the two-year yield) has narrowed to its lowest level since the pandemic-induced recession level. History suggests that such a complete reversal (as happened in 2019) would herald an imminent economic contraction.

On the stock market, benchmarks in Europe and Asia are heading for bear markets, both down nearly 20% from their recent highs. While the S&P 500 has fared better due to its safe-haven status relative to other regional stocks and its geographic distance from Russia, analysis by Deutsche Bank strategist Binky Chadha suggests that U.S. stocks are also sending troubling signals .

Chadha compared the trendline speed of the stock market indicator with the ISM manufacturing report and found that the current level of the S&P 500 predicts a sharp decline in the manufacturing indicator to 48, below the level in line with economic growth. Small-cap stocks reflected deeper problems, the strategist said the Russell 2000 index, which has entered a bear market, appears to be pointing to a decline in the manufacturing index (2759.412, -58.64, -2.08%) to 40, a level that indicates the US economy. will fall into a "severe recession".

At least three Wall Street strategists have also cut their end-2022 targets for the S&P 500 over the past week. Market veteran Ed Yardeni slashed his target for the S&P 500 for the second time in as many months, citing rising recession risks.

Academy Securities Inc. "We can all hope for the best, but preparing for the worst is a cautious risk strategy right now," Peter Tchir, head of macro strategy, wrote in a note.

On top of that, in the stock and bond markets, there was a moment when price action stopped being a sign of trouble and started to be a cause: People's sense of wealth diminished and investment decisions were put on hold. That's the risk facing commodity markets right now, where soaring prices could hit consumer sentiment.

Prices of everything from wheat, corn, oil to copper have soared after the Russia-Ukraine conflict sparked fears of supply shortages in the world's two largest producers. While much of the rise in commodity prices may have started months ago as a result of a surge in demand, the opposite of a recession signal, many traders believe the latest rally could push the world into a recession.

Among them, the surge in energy prices is particularly terrifying. This not only puts pressure on household consumption, but also increases price pressures and could prompt the world's major central banks to tighten monetary policy to combat inflation.

Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth, said: “Oil prices, the yield curve and where we are in the economic cycle are all definitely signaling a recession. I’m not saying the day is going to collapse. , but I do think that's definitely going to happen in the next 12 months."

Is The Market Worried Too Much?

In all fairness, the market will always overreact. Panic has taken hold of investor psyches at the moment, asset prices have surpassed anything justified by fundamentals, and markets are facing multiple threats, however, there is objection to projecting messages of any of these threats onto the global economy. According to one analyst, the impact of the pandemic itself on oil prices has been dampening — with many people working from home, the tax levied on soaring oil prices could be mitigated.

According to Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management, the current volatility is driven by geopolitical turmoil that could be reversed quickly if Russia and Ukraine truce.

"How can we be in a recession with such a strong nonfarm payrolls data?" Ren said. "The current signal is a bit pessimistic about the future economic outlook, but it's not driven by economic data, it's driven by Geopolitical events are driven, so I don't know if that's informative."

Neil Dutta, director of economics at Renaissance Macro Research, said fears of an oil crisis were overblown. Not only are Americans in better financial shape today and can afford high energy bills, but real interest rates are still negative, leaving plenty of room for the central bank to raise rates without affecting the economy, he argues.

“I share the view that the Fed’s response to higher energy prices could exacerbate the downside shock, but we are nowhere near that,” Dutta said in a note. “Excess levels of consumer savings remain high, which may have a negative impact on The impact of oil prices acts as a shock absorber.”

In fact, for now, economists still expect the U.S. economy to grow strongly in every quarter of next year. In the past, however, such predictions were not always accurate.

A 2014 study by Prakash Loungani of the International Monetary Fund found that of the 49 recessions that occurred globally in 2009, economists had not accurately predicted one in the consensus reached a year earlier. And of the 60 recessions in the 1990s, only two were accurately predicted a year in advance.

There are also compiled data showing that of the multiple 20% declines in U.S. stocks since the Great Depression, only two have preceded or coincided with a U.S. recession.

In a way, today’s environment is similar to the oil price spikes triggered by Iraq’s invasion of Kuwait in the past. At the time, the S&P 500 fell into a bear market and the U.S. economy fell into recession.

"Perhaps scary enough, in 1990, the fed funds rate was at 8 percent and finally started an easing cycle," Strategas Securities strategist Ryan Grabinski wrote in a note. Today, the Fed is at the beginning of a rate hike cycle. , a recession seems increasingly inevitable."