• April 2, 2023

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The odds are increasing of a global recession next year. Vanguard puts it at 60%. But independent investment research firm, Ned Davis Research, is even more bearish. They have the odds of a global recession pegged at 98%. One wonders what are the 2% odds that things turn the other way? The only plausible signals would be an end to interest rate hikes and the end to the war in Ukraine.

Ned Davis Research made this market call on September 28.

The European Union, with its bans on Russian piped natural gas, and the recent damage to the Nord Stream pipelines in the Baltic Sea, mean high energy prices are hurting businesses as much as high interest rates. Europe is already in a recession, and is worse off than the United States, both JP Morgan and Goldman Sachs have said in the last three weeks.

Russia will likely squeeze its natural gas supply that transits through Ukraine into Europe, and Ukraine’s electric power generation, damaged from the recent bombings in Kyiv, will be focused on local needs rather than shipping electric power into Europe. So, Europe’s odds of a recession are actually 100%.

Recession ‘Crashwatch’ Ahead

Fed Funds futures are priced for 127.5 basis points of additional rate hikes over the next two meetings, ending in December. That would bring the Fed Funds Rate from 3.25 to around 4.5%. This is what big banks use to borrow and lend to each other, and not what retailers will pay. That means mortgages will be nearly double this amount. Student loan costs will also rise, barring additional interest rate subsidies to the Federal Student Loan Program.

For Wall Street, it means margin costs are more expensive. Funds that buy on margin will then buy less on margin, weakening demand for securities overall.

Given the recent emergence of financial vulnerabilities locally and the Fed leadership’s position on inflation, investors are now more willing to err on higher interest rates than lower ones.

This was not the case a few months ago when many on the Street felt that there was no way the Fed would continue to tighten in an economic slowdown. But considering how slow the Fed reacted to inflation earlier this year — with ex-Fed chair and now Treasury Secretary Janet Yellen calling inflation “transitory” — the Fed is forced to choose between growth and its inflation-fighting mandate.


“Increasing talk of the Fed breaking something is not simply idle chit-chat anymore,” says Brian McCarthy, head of Macrolens, an investment research firm in Stamford. “Given the course they’re on, it seems inevitable,” he says.

The U.S. economy is expected to grow nearly 3% over the last 12 months ending in the third quarter, the Atlanta Fed is predicting. Quarterly growth rates have been in decline, however.

Meanwhile, as has been widely noted, the sharpest rate of Fed Funds increases since Paul Volcker crashed the economy in ’81-’82 remains on pace, with banks reportedly hoarding cash to pay debts (like margin losses).

Ocean carriers are canceling dozens of sailings ahead of the holiday season in the U.S., marking another sign of falling demand and concerns that consumer spending will start to fall after being overheated. Much of the overheating was based on nearly a year and a half of forced lockdowns and money-printing stimulus, leading to massive savings build-up in the U.S. and inflation not seen since Jimmy Carter was in the White House.

Risk appetite has returned because of the lows in the market, however. That could build a floor under the S&P 500, giving investors some time to buy low without too much fear of lower lows. How solid of a floor is anybody’ guess, as much of it is dependent on the Fed and the war. But according to the S&P Global Investment Manager Index, the near-term market is seen as “improving” with renewed interest based on lower prices for securities.

“Lower prices are encouraging greater risk appetite,” says Chris Williamson, Executive Director at S&P Global Market Intelligence and author of the report.

But don’t get your hopes up. Sharp rallies are common in bear markets.

“The broader picture remains one of concern over the economic outlook in the U.S. and globally,” Williamson says.


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