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Chart of the Day - recession
"We're not scaremongering/This is really happening, happening/Mobiles working/Mobiles chirping/Take the money and run." - Radiohead

I have written the last couple of days and over the weekend about how I think the odds of a recession are increasing quite steadily. In fact, I have argued most of this year that the fundamentals argued a recession would happen by the end of the summer.

However, now that the mkt is anticipating the Fed backing off its hiking policy, we see riskier asset rising - tech stocks outperforming, crypto assets rising and credit spread narrowing.

Is that what really happens when a recession starts? Is it just that easy that the Fed hikes and things move lower then the Fed pivots and we move back higher. Is the Fed the only game in town?

Perhaps it seems so. In a conversation yesterday with MC, we asked ourselves when was the last time we can remember the Fed not mattering. We had to go back before the Great Fincl Crisis. For many in the mkt, that means before their careers started.

If we look at the chart today, I think history can be a guide for us. I plot the Fed Funds rate in white, and the yearly changes in SPX (blue), Bloomberg Commodity Index (green) and Barclays Agg for bonds (yellow). Recessions are highlighted in red

The first thing that stands is Fed hiking cycles, particularly robust ones, end in a recession. In life you hear fake it till you make it. At central banks it is hike it till you break it.

Then take a closer look at how each asset class performs once the recession starts and throughout. I think you might be surprised a bit.

Take stocks. Most think stocks are forward-looking and they are to an extent. The thing is, recessions don't last a month or two. Stocks have always fallen at the start of the recession. Yes, stocks begin to rally before the end of it, but they always fall when it starts.

How about bonds? Pretty much the same thing. Maybe a little more sideways and volatile action in 2001, but otherwise there is similar pattern to stocks whereby they fall in recession and rally as we exit. Remember this is an Agg & not sovereigns.

Commodities tend to rally more before the recession. This is the period of stagflation where inflation rises enough to choke off growth. Much like we saw last year. However, once the recession starts, commodities fall.

Yet looking at YTD performance, stocks are up led by tech. Credit spreads are pretty flat but the absolute level of yield on credit is lower with the Treasury rally. Only commodities are down.

So maybe the Fed says 25 bps more today and pauses to assess (my base case). Maybe it backs off entirely. Does that mean it is time for everything to rally? I am not so sure.

"We're not scaremongering/This is really happening, happening/Take the money and run."

Stay Vigilant
#markets #investing #stocks #bonds #commodities #economy2023

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Rihard Jarc's avatar
The market is digesting the recession risk (negative) with no more interest rate hikes (positive), which one will prevail is probably also depended on the sector. Many sectors got a boost because of higher rates and higher inflation, this might change now.
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