What is the logic to suggest that a “short & shallow” recession is likely? Isn’t it more likely things will get worse before they get better?
- The U.S., Europe and China are experiencing economic slowdowns. The U.S. is in a recession if you believe the Atlanta Fed (GDPNow for Q2 2022 is -1.6%. See GDPNow HERE). What is the rationale to support a quick economic rebound over the next several months? How can bulls so comfortably dismiss the potential for the global economy to further deteriorate?
- Rates are likely to climb for the remainder of 2022. We believe the Fed and ECB will hike into a recession, pushing the Fed Funds Rate higher. 2023 is a different ballgame as Fed Chair Powell is hardly someone who may be characterized as steadfast. However, we believe Powell is sufficiently intelligent to not pivot policy this year. If the Fed were to stop hiking rates after September’s FOMC meeting the U.S. will be faced with a prolonged stagflationary period similar to the 1970s. Insofar as interest rates are moving higher, risk assets will move lower all else held equal.
- Companies have slowed hiring. Look no further than Amazon (AMZN), Apple (AAPL), Facebook (FB) and Microsoft (MSFT), to name a few. What is to say hiring will not slow further?
- Earnings are likely to deteriorate beginning with the June quarter EPS reports. We expect that most reporting Technology companies (enterprise and consumer), will speak of having less Revenue and EPS visibility into the back half of 2022. It is unclear what percentage of those firms will adjust 2H 2022 Revenue and EPS guidance downward on this month’s earnings calls.
- What’s the catalyst for an equity market rebound? I did not get the sense that equity markets capitulated in June. I do not believe that the Fed will pause rate hikes this calendar year and certainly do not believe that the Fed will reinstitute QE (an abomination), this year.