Recession or no recession? What the financial experts say

As market jitters grow and rumors of an impending recession grow louder, a group of financial experts continues to debate whether the storm will really break or if the economy is setting the stage for another expansion. Such uncertainty is reminiscent of the adage that “economists have predicted nine of the last five recessions”.

This time it’s an intertwined tale of skepticism, boom optimism and general anticipation of recession.

The U.S. economy may have entered an ‘expanding phase’

Wall Street’s most bullish analyst, Tom Lee of Fundstrat Global Advisors, remains firm in his conviction. He argues that the economy is not sliding into recession, but rather into an expansion phase.

Lee’s arguments hinge on a cocktail of factors – falling commodity prices, a recovering supply chain and an invincible labor market.

“I think those are conditions for earnings to outperform, and at a time when investor positioning has been so offside. I don’t think stocks are overstretched. I think FANGs have done the bulk of the work [in this year’s rally]. And if we slip into an expansion, a lot of other names are going to participate,” Lee said.

His assertion joins Jay Hatfield of Infrastructure Capital Management, who predicts a future drop in inflation that would allow the Federal Reserve to end its rate-hiking spree. Although the Fed recently opted to maintain current interest rates, new projections indicate that a hike in borrowing costs of up to half a percentage point may be required before the end of the year.

According to Hatfield, lower inflation and the AI ​​boom could keep the stock market boiling and stimulate economic activity.

“We believe the Fed will be forced to capitulate to its ‘entrenched’ theory of inflation, just as it capitulated to its ‘transitional’ theory, as year-over-year data confirms that inflation is plunging “, said Hatfield.

But on the other hand, bond traders and a large segment of financial experts believe that the Federal Reserve’s aggressive stance on interest rates could ultimately push the economy into recession. This cohort believes that the Federal Reserve’s increased emphasis on controlling inflation could end up stifling the economy.

The risk of recession in 2023 is real and CEOs are ready

A recent survey sums up the feeling that a recession is near. Most respondents are convinced that the Fed’s tightening of monetary policy could trigger a recession next year.

This school of thought suggests that the central bank’s emphasis on controlling inflation could have undesirable consequences – an economic recession.

“The Fed was clearly trying to send a hawkish message that they weren’t quite done yet and didn’t think they had made enough progress on inflation. You see the curve flattening and rates don’t hold not account for the full extent of the hikes, so it is believed that these hikes can bite and that the Fed is closer to the end, “said Michael Cudzil, portfolio manager at Pacific Investment Management Co.

Market guru Jeremy Siegel adds caution to the tale. He warns of an impending slowdown in the stock market rally and a possible mild recession.

Siegel’s assessment of future Fed actions is also worth noting. Hence, suggesting that political pressure to prevent a deep recession could block further rate hikes.

“This recent bull market development does not guarantee that we are out of the woods after the recession. With that caveat, I have a feeling the October low will hold, but I remain cautious and don’t think we have the start of a major upside here,” Siegel said.

However, the economy currently presents a paradox. Despite fears of a recession, which led 93% of CEOs to brace for a potential downturn, the economy could still see robust consumer spending, low unemployment and a rising stock market.

“To say this is a unique cycle is to state the obvious, but in terms of the nature of our position in the cycle, there really is no historical comparison,” said Liz Ann. Sonders, chief investment strategist at Charles Schwab.

Economists explain this anomaly as “rolling recessions” – a concept where some sectors experience a slowdown while others prosper. But Ed Yardeni, president of Yardeni Research, makes a compelling point.

According to him, “if we have a recession, it will be the most widely anticipated recession of all time”, alluding to the exceptional preparation of companies for an economic slowdown.

“Usually recessions surprise everyone, and everyone is stuck with a lot of business that was built on the assumption of growth for the foreseeable future. And then all of a sudden the ground falls from under them. “said Yardeni.

Recession or no recession? What to do?

For investors, the scenario presents a dilemma. Although stock indices are buoyant, a significant portion of this performance is attributed to a handful of large-cap companies. This has distorted market performance and investors’ assumptions about future Fed interest rate adjustments point to potential volatility.

Experts advise investors to maintain a long-term outlook, favor high-quality stocks with strong balance sheets, and focus on bonds with high credit ratings. The key is to stay invested while positioning portfolios to withstand potential volatility. And when it comes to cryptos, financial experts believe that these assets will not serve as a hedge.

“Last year shattered the practical myth that cryptocurrencies are recession protection. The truth is, crypto prices have proven to be affected by the same directional sentiment that affects retail equity investors” , said Dan Raju, CEO of Tradier.

Faced with divergent expert opinions and an unprecedented economic climate, it seems prudent to navigate cautiously, remaining nimble and ready for all eventualities.

Whether the pendulum swings toward recession or expansion, today’s economic narrative reaffirms age-old wisdom – “fortune favors the prepared mind.”