Bassanese Bites: Growth scare – May 16 2022

Global markets

It was another challenging week for global markets, not helped by a higher than expected U.S. inflation report and a concession by Fed chair Powell that he might not be able to stop the economy tumbling into recession. China’s harsh yet seemingly futile efforts to contain COVID via lockdowns is also unnerving sentiment, as are ongoing energy and food disruptions caused by the entrenched war in Ukraine.

Despite a net loss for the week, however, Wall Street saw fit to rally on Friday if only because the market appears deeply oversold in the short term. Indeed, what was notable last week was that although equities dropped further, bond yields also eased – which I suspect reflects investor attention starting to focus on the risks of a growth slowdown as the Fed funds rate inexorably heads higher in coming months.

Don’t be fooled – Wall Street has far from priced in the risk of a recession, with earnings expectations still holding up and price-to-earnings valuations only back to around their average of recent years. If the U.S. does tumble into a recession later this year or next, the peak-to-trough decline in the S&P 500 is likely to be deeper than the near-20% decline seen to date – I’d expect a fall of at least 35%.

Click to read the Full Report