Will the US Experience a Recession in the Near Future?
What we don’t know
- How the stock and bond markets will perform in the short term
- How long inflation pressures will continue
What we do know
- The Federal Reserve will continue to raise interest rates.
- The job market will remain robust and wage pressures will continue.
- Corporate earnings look very good.
- There are more buyers than sellers in the housing market.
Below are three keys that determine whether the Fed can be successful in slowing down the economy without causing a major recession. In our opinion, we cannot have a recession without at least two of these indicators experiencing a drastic slowdown.
1. Housing - Probably the easiest of all the major economic components for the Fed to manipulate. Higher rates will eventually slow down the housing market. Two things to keep in mind:
- We have not built enough housing units over the past decade.
- Selling inventory is low.
This supply demand picture should protect the real estate sector from experiencing a drastic slowdown.
2. Earnings - Last year was a record year for corporate earnings and 2022 is currently on pace for +10% growth. In fact, earnings projections today are better than they were at the beginning of the year.
3. Employment - With almost two job openings for every worker looking for employment the job market tightness will continue. This is an area the Fed would love to see slow down and provide some relief to inflation. Today’s release of payroll figures for April showed over 400,000 net new jobs were created and that wages are growing but at a slightly slower rate.
Source: Bloomberg and Goldman Sachs Asset Management. As of May 5, 2022.
The S&P 500 has seen one of its worst starts to the year in the post-WWII period. However, history suggests that markets tend to recover given supportive fundamentals. We believe the strength of jobs, earnings and housing will keep us from experiencing a recession in 2022.
Non-recessionary calendar years with 13%+ drawdowns have seen an average annual return of 2%. In fact, 7 of 15 years saw a positive annual return and in 14 of those 15 episodes, the S&P 500 outperformed 2022's YTD returns. As such, we believe there is meaningful upside for the S&P 500.
Sincerely,
Dan Moskowitz