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The Possible Impact of an Avoided U.S. Recession on Stock Markets
Bracing for a Recession
Investec equities strategist Roger Lee suggests that stock markets could face negative consequences if the United States manages to avoid the recession that many experts believe is imminent. Lee claims that the market is preparing itself for a recession within the next year, an event that he describes as the "most widely forecast recession in history."
Several economists are predicting a mild U.S. recession, with HSBC indicating that the country will enter a downturn in the fourth quarter, followed by a year of contraction. However, Lee argues that these predictions are based on "soft" data, such as surveys of purchase managers, rather than the more reliable "hard" data like labor market figures, which currently show a healthier U.S. economy.
The Role of Hard Data
Lee emphasizes that hard data, such as labor market figures, do not support the notion that the United States is heading towards recession. In fact, recent ADP jobs data suggests a more positive outlook. The private sector added 497,000 jobs in June, surpassing the Dow Jones consensus estimate of 220,000 jobs and reversing the previous month's decline. This disparity between expectations and hard data could have significant implications for the stock market.
The Risk of Inflation
If a recession does not materialize, it could lead to higher and more persistent inflation than what investors currently anticipate. Lee explains that the current "breakeven rates," which reflect the difference in yield between inflation-linked debt and nominal debt, are mispricing inflation. He argues that if average inflation is expected to be 2% over the next two years, but U.S. inflation is currently over 4%, then inflation would need to decrease to zero, which seems highly unlikely. This discrepancy could result in a downturn in both equities and bond markets.
Implications for Equities and Bonds
An increase in breakeven rates would have significant implications for U.S. treasury yields, pushing them upwards. As a result, bond prices would decline, which typically occurs when yields rise. The recent ADP jobs data caused the 2-year U.S. Treasury yield to reach 5.12%, a level not seen in 16 years. Lee suggests that this would put valuation pressure on highly valued stocks, particularly growth stocks. Therefore, if the U.S. recession does not occur and inflation remains high, prices of highly valued stocks may fall while those of lower-valued, value, or cyclical stocks could rise.
Potential Opportunities in the U.K. Market
Despite the potential risks, Lee believes that the U.K. market, which is predominantly composed of value or cyclical stocks, could benefit if the U.S. dodges a recession. He also anticipates a resurgence of value stocks, such as banks, mining, and oil companies, in this scenario. Therefore, if the recession risk recedes, Lee expects the S&P 500 to experience a decline while the FTSE 100 rises, similar to the market movements observed in 2022.
The possibility of an avoided U.S. recession has both positive and negative implications for stock markets. While the avoidance of a recession could lead to higher and more persistent inflation, which could negatively impact equities and bond markets, it may present opportunities for certain sectors, such as value stocks. The outcome will largely depend on how the U.S. economy performs in the coming months.
Hot Take: The Impact of an Avoided U.S. Recession on New Businesses
The potential impact of an avoided U.S. recession on stock markets has significant implications for new businesses. Here's a hot take on how this topic may influence startups and budding entrepreneurs:
1. Funding Landscape: If the United States manages to dodge a recession, it could lead to increased investor confidence and a more favorable funding landscape for new businesses. Investors tend to be more cautious during economic downturns, making it challenging for startups to secure the necessary capital. However, in an economic environment where recession risks recede, investors may be more willing to invest in new ventures, providing greater opportunities to access funding and fuel growth.
2. Sector Opportunities: The potential resurgence of value stocks, particularly in the U.K. market, presents new business opportunities in sectors such as banking, mining, and oil companies. Startups operating in these industries or providing support and innovative solutions to these sectors can take advantage of an environment where these value stocks may thrive. This could lead to potential collaborations, partnerships, or acquisition opportunities for new businesses to capitalize on the market movements.
3. Shift in Investor Focus: An avoided U.S. recession may result in a shift in investor focus from growth stocks to lower-valued, value, or cyclical stocks. This shift can provide opportunities for new businesses that have been traditionally overlooked due to the dominance of high-growth startups. Investors may seek out undervalued or underappreciated startups with solid business fundamentals, opening doors for those looking to disrupt industries and offer sustainable long-term solutions.
4. Strategic Pivoting: Startups need to be adaptable in response to changing market conditions. If the U.S. economy performs positively and avoids a recession, new businesses may need to reassess their strategies and align them with the evolving investment landscape. This could involve evaluating market demand, refining business models, or capitalizing on emerging trends to position themselves favorably and take advantage of potential financing and partnership opportunities.
5. Global Market Interplay: The interconnectedness of global markets means that an avoided U.S. recession can spill over to other economies. New businesses that have a global outlook can tap into opportunities emerging in markets beyond the United States. It's essential for startups to stay informed and agile, as changing dynamics in one market can create openings for growth and expansion in others.
In summary, the impact of an avoided U.S. recession on stock markets can create a more supportive funding landscape, sector-specific opportunities, and a shift in investor focus. New businesses that remain adaptable and strategically position themselves to capitalize on these market movements can seize growth opportunities and thrive in an evolving economic landscape.
Article First Published at: https://www.cnbc.com/2023/07/12/the-biggest-risk-to-markets-is-if-the-us-avoids-a-recession-strategist-warns.html