The possibility of a US recession is cited by Morgan Stanley’s Michael Wilson as the key factor for markets. Wilson is bearish, saying the S&P 500 will fall to 3,400 (15 per cent below current levels) before the end of 2022. If the US falls into recession, however, it could fall to 3,000 – a 25 per cent drop.
So will the US avoid recession? Goldman Sachs reckons there is a one in three chance of a US recession over the next year. UBS puts the odds at 40 per cent. However, Liberum strategist Joachim Klement is less sanguine, saying recession is “all but inevitable”.
Klement cites UCLA research which estimates US recession odds by looking at four factors – interest rates, inflation, unemployment, and the housing market. Inflation data suggests an 89 per cent chance of a recession over the next 12 months.
Bulls note unemployment is low, but that doesn’t mean a recession is unlikely. In fact, Klement says current labour market data is “perfectly in line with the onset of a recession in the next 12 months”. Housing starts over the past 12 months indicate a 77 per cent chance of a recession over the next year.
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The steepness of the US yield curve is the one exception – it suggests any recession is more than 12 months away. Nevertheless, the overall picture suggests US recession odds are high. “When it starts and how deep and long-lasting it will be”, adds Klement, “remains an open question.”
