An increasing number of Wall Street experts are now forecasting a possible economic downturn on the horizon, with alarms growing louder after the widely-observed yield curve inverted last week and indicated a looming recession.
Deutsche Bank on Tuesday became the first major bank on Wall Street to forecast a recession next year, albeit a “moderate” one, thanks to the combination of surging inflation and rising interest rates.
The firm’s economists predict the U.S. economy will take a “major hit from the extra Federal Reserve tightening by late next year and early 2024,” while also predicting “two negative quarters of growth and a more than 1.5% rise in the U.S. unemployment rate.”
So long as Russia continues to pursue its invasion of Ukraine, which has caused severe market volatility since February, “recession and stagflation will be serious threats,” says Moody’s Analytics chief economist Mark Zandi, who adds that risks are “uncomfortably high.”
Goldman Sachs analysts similarly warned in a recent note that the period of stagflation that occurred in the 1970’s is the most “clear example” of the economic environment investors are facing today.
Some experts have taken it even further: Economist William Dudley, former president of the Federal Reserve Bank of New York, last week called a recession “virtually inevitable” as the central bank is too far “behind the curve in controlling inflation” and Fed chair Jerome Powell remains too optimistic about a soft landing.
Former Fed Governor Lawrence Lindsey, meanwhile, said in an interview on Monday that the economy will fall into a recession as quickly as this summer, with the central bank “nowhere close” to controlling inflation, which he predicts will force consumers to drastically cut back on spending.
An upcoming recession or period of stagflation “critically depends” on whether the Fed is able to raise interest rates fast enough to sufficiently slow economic growth and defeat inflation, but “not so fast that it undermines growth and the recovery,” says Zandi. “This will be tricky.”
While some forecasters are sounding the alarm, the majority still say a recession is unlikely in the next year. Despite surging oil prices and rising interest rates roiling markets, corporate profits and consumer spending have remained solid, which should hedge against any slowdown in economic growth, experts say.
Higher prices due to inflation are costing the average U.S. household an additional $296 per month, according to a report from Moody’s Analytics last month.
Goldman analysts recommend a basket of high-growth, high-margin stocks to weather market uncertainty. The list includes tech stocks like Google-parent Alphabet and chip stock Micron, as well as dating app company Match and payments giant Mastercard. The firm also warned investors to stay away from several companies with low profitability, including DraftKings, Carvana and DoorDash.
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