The odds of the U.S. economy falling into recession by next year are greater than 50%, Richard Kelly, head of global strategy at TD Securities, said Monday, outlining three possible ways it could get hit.
Rising gas prices combined with a hawkish Federal Reserve and a generally slowing economy are among the tripartite risks facing the world’s largest economy right now, according to Kelly.
The recession prediction is based on two assumptions: first-quarter growth was negative, and a recession is defined as two consecutive quarters of negative growth.
As a result, if second-quarter growth is estimated to have been negative, the stock and bond markets could react by rising in the very short run. A recession might lead investors to believe that the US Federal Reserve will ease up on its aggressive interest-rate hikes.
But there are three major flaws to this reasoning. First, growth is as likely to have been positive as negative in the second quarter.
Yes, the Atlanta Fed’s GDPNow model estimates a second-quarter annual growth rate of -1.5%, based on data available through July 15.
Nonetheless, some economists – including me – would argue that growth was more likely positive in the second quarter.
Even if the BEA estimate is negative, however, it does not necessarily mean that the US has entered a recession. That is because – and this is the second flaw – a US recession is not defined as two consecutive quarters of negative growth.
An oversight of the performance of the US’s second-largest bank this quarter was its revenue, which rose from $21.5 billion to $22.7 billion year over year, majorly because of high interest rates and a surge in the level of lending.
Bank of America’s profits decreased dramatically over the previous year after the bank disclosed billions of dollars from its loan loss reserves, which it had set aside during the epidemic to cover some potentially risky loans.
JPMorgan analysts earlier this week wrote they believe growth stocks have a “tactical opportunity” to make up lost ground, citing cheaper valuations after this year’s sharp sell-off as one of the reasons.
Value stock proponents cite many reasons for the investing style to continue its run.
Growth stocks are still more expensive than value shares on a historical basis, with the Russell 1000 growth index trading at a 65% premium to its value counterpart, compared to a 35% premium over the past 20 years, according to Refinitiv Datastream.
Meanwhile, earnings per share for value companies are expected to rise 15.6% this year, more than twice the rate of growth companies, Credit Suisse estimates.
Morgan Stanley expects these pressures to continue to weigh on stocks over the next year. It predicts the S&P 500 will stand at 3,900 points in a year’s time — only a tiny bit higher than Monday’s level of around 3,890.
US stocks have fallen sharply this year, with the S&P 500 down around 18% from its recent high at the start of January. The index has risen around 6% over the last month, with some investors believing the sell-off has been overdone.
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