Global stock markets are unlikely to bottom out soon amid recession fears, according to analysts at Nomura, who expect the US economy to see five straight quarters of declining GDP (gross domestic product) growth.
The silver lining, however, is that the recession will be shallow – a peak-to-trough decline in US real GDP of around 1.5 per cent in this cycle compared to declines of nearly 10 per cent during the pandemic and around 4 per cent during the GFC, Nomura said.
“History shows that stocks tend to bottom out during recessions—and not before —and thus, if Nomura’s macro view does materialize, investors will probably have to wait longer for a likely bottom in global stocks. Asian stocks will not be fully immune, but we expect some differentiation,” Nomura said.
Stocks in the past week were sharply lower, as Treasury yields also fell on recession expectations. The 10-year yield stood at 2.89% on Friday, tumbling from 3.49% just two weeks ago. Some strategists had expected to see an up week for stocks as portfolio managers bought equities to rebalance their portfolios at the end of the second quarter.
The S&P 500 rallied 1.1% Friday but was off 2.2% for the week, ending at 3,825. The Nasdaq Composite gained 0.9% Friday, but was down 4.1% for the week.
“Right now, the market is trying to stabilize with some real quarterly flows,” said Scott Redler, partner with T3Live.com. Redler said if the start of the new quarter and month does not bring in fresh money and support the market in the next several sessions, that will be a negative sign for stocks and could signal that the market will soon test its lows.
Investors are aggressively selling stocks amid of a toxic cocktail of events. On one hand, inflation is hitting multi-decade highs. And at the same time, the Federal Reserve is jacking up short-term interest rates. The result? Investors fear the onset of dreaded stagflation — or a period of rising prices and slowing growth.
“Stagflation risk is real and we may already be there. Inflation is running hot and the last GDP print was negative. To some, our economy may feel very much like we have stagflation, with higher prices and slowing consumer confidence,” said Nancy Davis, founder of Quadratic Capital Management.
Signs of economic weakness are multiplying, with personal spending falling in May for the first time this year, after accounting for inflation, and a US manufacturing gauge hitting a two-year low in June. JPMorgan Chase & Co. chief US economist Michael Feroli responded to the latest data by cutting his mid-year growth forecasts “perilously close to a recession.”
The depth and length of the recession will largely be determined by how persistent inflation proves to be, and by how much pain the Fed is willing to inflict on the economy to bring it down to levels it deems acceptable.
Allianz SE chief economic adviser Mohamed El-Erian said he’s worried about a stop-go scenario akin to the 1970s, where the Fed prematurely eases policy in response to economic weakness before it has eradicated inflation from the system.
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