If you ask Goldman’s clients, the odds of a US recession in 2023 are pretty good. Or, perhaps more aptly considering recessions are adverse events, pretty bad.
During the bank’s global strategy conference over the weekend (which was held in person for the first time since the pandemic), Goldman queried hundreds of clients on the most pressing macro and market issues facing investors in the new year.
57% expect a downturn in the world’s largest economy. “This is slightly more optimistic than consensus where the average recession probability stands at 65%,” the bank’s Guillaume Jaisson remarked, adding that the “relative ‘bullishness’ might be due to the market bounce YTD and the recent good news on the growth-inflation mix.”
Goldman’s economists don’t see a recession in the US in 2023. In their view, a downturn isn’t necessary to corral inflation.
Asked about the likely trajectory of Fed funds, two out of three Goldman clients said the Fed will hike by another 50bps to 75bps and then stop, roughly aligned with market pricing. Half said the Fed would cut in H1 2024, and 20% expect easing by the end of this year.
Goldman detailed client responses from its global strategy conference on the same day BofA released the January vintage of Michael Hartnett’s Global Fund Manager survey. Although panelists in the BofA poll were more optimistic about growth, “optimistic” was a relative term. A net 68% expected a recession in the next 12 months, down considerably from the peak in November, but still among the highest readings in nearly two decades. At the same time, respondents tilted more dovish on the Fed.
FMS participants now see Fed funds peaking at 5% in Q2. Just 20% said the peak will be 5.25% or above, down markedly from 44% in December.
To the extent investors and bank clients are feeling more dovish about the Fed, that’s probably due more to incrementally favorable inflation data than it is recession fears. In other words: Recent events suggest Jerome Powell might yet land this plane.
“Almost across the board, the macro worst-case scenario left-tail distribution of outcomes is being repriced lower while simultaneously, the good outcomes of ‘transitory’ / ‘Goldilocks’ / ‘soft landing’ pick up delta,” Nomura’s Charlie McElligott wrote, in a Tuesday note.
Interpreting market pricing for the Fed in this context isn’t entirely straightforward, but the “placeholder” cuts still priced into the back half of the year are surely predicated on recession fears, not soft landing hopes. This isn’t a Fed that’s going to cut rates “just because,” so to speak. If inflation moderates and the economy holds up, Powell probably won’t support rate cuts for the sake of them.
“What is the largest market disconnect right now?” McElligott asked, before answering his own question: “This pricing of a US recession scenario, which currently would see the Fed terminal rate peak at 4.92% in early- / mid-summer, before forcing the Fed to cut ~50bps by December and ~200bps by December 2024.”
Charlie juxtaposed the cuts priced by traders with an “increasingly sanguine Goldilocks outlook, which could see the Fed land the plane successfully, as inflation rapidly normalizes” against a still-strong US labor market which may be “able to offset the legacy tightening which has already occurred.”
When you toss in signs that Europe may, against all odds, avoid a recession, and hopes that once China’s terrifying wave of post-“COVID zero” infections abates, the world’s second-largest economy will help the world avert a downturn, the odds are shifting back in favor of a benign outcome.
As McElligott suggested, if that trend continues, traders may eventually be compelled to remove those rate cuts from H2 2023, particularly if 3.5% is the new 2% when it comes to “price stability.”
I dread the possibility of recession, but I like that Goldman says it’s not necessarily in the cards. If we see a recession, I don’t expect it to be like the recessions of old. The market has better footing beneath it, thanks to the collective thoughts and actions of Volker, Greenspan, Yellen, and Bernanke. In my opinion, they did the hard work.
Powell needs to keep his fingers on the pulse of economic reality, yes. That by itself can be tricky. I don’t expect a soft landing. But I’ll take it.
I invested casually in the 90s and was less active in my accounts. I recall the 2001 recession because I was more squeamish and less experienced in dealing with down markets at the time. It was not a difficult recession.
But having less understanding about how to manage the losses, I flinched. I don’t even recall what stocks I owned at the time. But whatever it was, I bailed out, had losses, and felt discouraged.
The “Great Recession” was another matter. By that time, my investments were positioned differently. It was necessary to take some losses. But the downturn dramatically lowered the pricing on some very good companies, shining light on the value enabled by the recession. The market presented clear opportunities to make up for any losses, and then some. Invested in some of those companies set my portfolio on a more viable and stable path.
I, for one, don’t understand why 2% is “good” inflation. At 2% the dollar loses half its purchasing power every 35 years. How is that good? I guess my views are still tainted from having read Von Mises as a teenager in the 70s.
Well, I mean, the admittedly stylized argument just turns your logic on its head and asks you this: If prices fall every year, or often enough to make the medium- and long-run trend such that the dollar tends to gain purchasing power over time, anyone who buys anything they don’t absolutely need is an idiot, because the odds of whatever it is being cheaper later are very high. Nobody wants to live in an economy where everybody who buys the same thing you bought today two years from now gets a better deal.
H-Man, I am in the camp the strong services labor market may save the day.
I’m in this camp too, for about the next 9 months.
I believe that yield curve inversions of the current magnitude have a near-perfect record in recession prediction.
It could be “different this time”, but that seems a low-odds bet to make.
The strength of the labor market is undeniable; there are cracks, but not many.
Look beyond jobs, and I think the picture is darker. Whether industrial production, retail sales, home sales, etc beat or miss consensus is only a measure of how bad economists and investors are at forecasting, and thus less interesting, in my view, than if they are accelerating or decelerating. Mostly decelerating.
Can there be such a thing as a “job-full recession”?
Normally, if people don’t lose jobs, the economy doesn’t contract.
What happens if four million persons are rapidly deleted from the labor force due to early retirement, Covid death and disability, and barriers to migration? That is ~2.5% of the pre-2020 labor force who “lost” their jobs, in a sense. Suppose the remaining workers see their income decline ~5% in real terms. Simplistically, that could imply a ~7% decline in economy-wide real wage earnings. Add to that the substantial decline in asset wealth represented by portfolios and houses, the cost of higher borrowing rates, and the withdrawal of however many trillions of dollars in fiscal stimulus, and it sums to quite a headwind.
My view: we are going to have a recession, it will be an unusual one, feeling manageable to many workers, while feeling more daunting to their bosses and companies.
If you have to have a recession, that’s probably the kind you want. I will happily credit Powell with a “soft landing” if this scenario plays out.
Interesting points about the workforce. Immigrants, legal or otherwise, are among those who are filling jobs. A lot of boomers took the road to retirement when the prospect of recession arose in the economy. But other boomer geezers are still working. I consulted for 18 months after the owner of my company said I cost too much. I am 66, but just hired full-time at a large American technology company.
Declines in asset wealth come with the territory. Like I noted in earlier comments above, the downturn can present opportunities. Don’t hurry yourself. There are always investing opportunities, but you need cash. Stay away from margin buying. Unless you’re liquid, it’s way too risky, especially in a weakening economy.
Declines in asset wealth represented by portfolios and houses can indeed be headwinds. But this too shall pass. If you can persist as an investor, learn from your losses, learn how to pick companies, and how to balance a portfolio, you can grow and succeed as an investor.
We benefit by having an information asset like The Heisenberg. He worked in the business for a long time. He knows what he’s doing. He obviously loves it. He may have hung up his spurs, but you can’t take it out of him and he’s sharing it with our humble community. He won’t tell you what to do, but he provides valuable perspective about our investment landscape. So, this is a good place to be.
There are many other folks here like you and me. Bottom line, investing occurs over the timeframe of your life. It requires a lot of patience. It occurs over many economic cycles. If you can persist, you’ll experience many wins and losses. It’s a much more natural and rewarding pursuit than golf.