To The Moon

US recession risks were soaring even before the latest FOMC meeting and “dot plot” guidance. The NY Fed recession probability indicator stands at 25%. The 10-2 years yield curve inverted for two months. Atlanta Fed Q3 GDP Nowcast closing on a negative note after consecutive Q1 and Q2 declines. But not all recessions are created equal.

We face a cyclical downturn, hopefully the shortest and least damaging variety of this rare species. It will be painful but still investable and we will see a gradual U-shaped market recovery.

Recession types can be broadly be divided into three.

1. Cyclical recessions are the most common. This type of recession last an average of 10 months, with 2% peak-trough GDP and 14% earnings fall.

2. Shock recessions, like the 2020 global pandemic or 1973 oil crisis, are uncommon, short-lived, but often have the greatest impacts on GDP.

3. Systemic recessions, like the global financial crisis, are also not common. But have the biggest impacts on earnings (-28%) with large GDP falls (-3%) and typically last the longest.

The coming recession is going to cyclical. With central banks hiking interest rate to cool inflation whilst much of the inflation is driven by the prior pandemic shock, supply chain bottleneck, Russian Ukraine conflict. It may now take a longer time to bring inflation back to the 2% target. 

But at least this is not a systemic downturn. Labour markets are strong. Most companies still reported profit growth. Bank are well-capitalised with positive provisioning. Household have deleveraged. Risk is high but this is not an uninvestable downturn.