That recession so many have expected over the past two years has not yet materialized. By the reckoning of Ned Davis Research, there are no signs that an economic downturn and its misbegotten compatriot—a bear market in equities—are imminent.
A big reason the Federal Reserve is poised to reduce its benchmark interest rate, with an announcement expected Wednesday, is its concern that the economy is about to slow. Still, Fed Chair Jerome Powell avoids the R-word in his predictions, saying that his aim is to find a “soft landing,” whereby the nation avoids both a recession and high inflation.
“Economists do not have a great track record identifying recessions beforehand,” wrote Ed Clissold, Davis’ chief U.S. strategist, and Thanh Nguyen, a senior quantitative analyst, in a commentary. They wrote that some indications of a pending downturn have cropped up since 2022—notably the inverted yield curve, in which short-term yields are higher than long-term ones.
But other factors, such as a growing gross domestic product (up 3% in this year’s second quarter from 1.4% in the prior three-month period) and increasing retail sales, bolster the optimistic case, Clissold and Nguyen contended.
Thus, “the risk of recession in the next several months is low,” they wrote. As a result, turning to defensive stocks (health care, utilities, consumer staples) soon is a bad idea, they cautioned.
The report detailed the run-up to past recessions, such as the bursting bubbles of the dotcom crash in 2000, the global financial crisis of 2008 and 2009, and the 2020 pandemic. Indeed, the market’s current fascination with artificial intelligence stocks could bring another burst bubble, the two strategists admitted. “But this is not our base case,” they added, apparently unconvinced that a fading of AI’s investor popularity would be strong enough to spread to the wider economy.
The stock market has played a role as predictor in the past, they indicated, and on average, an S&P 500 slide precedes a recession by six months. Nonetheless, the lead time between the start of a market descent and the arrival of a recession has fluctuated wildly over the past four decades, they found.
In 1981, for instance, stocks peaked just three months before the recession started in July. In the 2007-08 period, the S&P 500 topped out in October 2007, and the recession began two months later. The Davis report commented that recession-propelled bear markets tend to get worse as time goes by.
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Tags: Artificial Intelligence, Bear Market, bubbles, defensive stocks, Ed Clissold, Ned Davis Research, Recession