Inflation & Recession—Today’s Reality & Tomorrow’s Possibilities

Hawkeyed investors should be poised, ready to pounce on opportunities when this bear market turns bullish again—and it will. The question is when might conditions warrant a bear to bull shift.

Inflation is the key, and AMG National Trust’s investment team is closely watching for signs of its abatement. We continue to parse the data on America’s economic future in the coming months and how markets may respond.

“Trigger events for recessions are notoriously difficult to foresee. Although not inevitable, a recession in the next 12 months now has roughly a one-in-three probability of occurring,” said AMG’s Global Economist Alex Musatov, speaking at the company’s June 30 webinar Inflation & Recession—Today’s Reality & Tomorrow’s Possibilities. Click the video above to watch.

And that probability has been unpleasantly rising since January, as a series of setbacks to the global economy weighed on http://www.amgnational.com/insights/inflation-recession-todays-reality-tomorrows-possibilities/#videoWebmany economic indicators. Some gauges, such as Atlanta Federal Reserve’s GDPNow, even suggest that a contraction in real output is already underway. High inflation has proved more persistent than first thought, fueled by soaring oil and food prices resulting, in large part, from the ongoing Russo-Ukrainian war and lingering supply-chain issues related to continuing pandemic lockdowns in China. You can read more about how inflation trends changed as Russia invaded Ukraine in AMG’s Research & Insights post from April 7.

Still, if America did slip into recession, it would probably be mild, more of an economic reset than a severe deleveraging downturn. That’s because right now, the U.S. economy is churning away. Households, corporations and banks are all financially strong.

“We don’t have to worry about an economic implosion right now, barring an unexpected geopolitical event, such as a wider war in Europe,” said Earl Wright, AMG’s chairman and co-founder.

But that could change if the Federal Reserve’s (Fed) efforts to tame inflation with higher interest rates fail. Then, America could be headed for a longer, more severe recession and bear market, perhaps one with both inflation and higher interest rates. “The next six months are really important,” Wright said. “If they get inflation under control, the Fed will have a tool (lowering interest rates) to head off a recession.”

“As of today [June 30], the latest indicators suggest core inflation might have peaked, implying that the Fed’s 0.75 percentage point rate boost earlier this month might have had an impact on expectations,” said Musatov and Dr. Michael Bergmann, AMG’s chief economist and co-founder.

“If inflation is rolled over, the Fed can turn dovish … start lowering interest rates and supporting the economy,” said Josh Stevens, senior vice president of AMG’s Investment Group. Those two indicators may signal the end of the current bear market.

Stevens said that bear markets aren’t necessarily accompanied by recessions, noting there have been three such examples in the past 12 years. Non-recession bear markets typically recoup their losses quickly, in a few months, on average. Historically, if there is a recession, the bear market usually ends before the recession is over.

“If inflation is able to come down and Fed policy turn dovish,” he said, “that would be a sign of a new bull market and for investors to reposition and start applying ‘dry powder’ to buy stocks.” Stevens emphasized that investors would be unwise, at this point, to start selling, but neither should they rush into stocks. Patience is most important at this stage of the bear market as we assess the potential for lower inflation and a change in the Fed’s policy stance that might warrant a shift from bear to bull.

AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.