Don’t count out an economic downturn just yet People give up on recession as it arrives.

Don't count out an economic downturn just yet People give up on recession as it arrives.

The Looming Recession: Experts Remain Gloomy Despite Positive Signs

Despite solid economic data, some Wall Street strategists are sticking with their gloomy outlook for the economy and stocks.

In the face of positive economic indicators and a resilient job market, there are still lingering concerns about the possibility of a recession. Prominent among the voices warning of an economic downturn is Albert Edwards, a Société Générale global strategist. Edwards believes that while corporate profits have remained strong, there are still plenty of worrying signs that suggest a recession could be on the horizon.

According to Edwards, one of the worrying indicators is the Fed Survey of Senior Loan Officers, which shows a tightening of lending standards across different types of loans at banks across the nation. Additionally, there is a continued slowdown in money supply, further fueling concerns. Edwards emphasizes that these signals are not solely focused on the manufacturing sector, but encompass a broader range of indicators.

The problem is compounded by the spike in interest rates, which have risen from near-zero at the start of 2022 to over 5% today. The Federal Reserve recently raised interest rates by 25 basis points, marking the highest fed funds rate in 22 years. Edwards warns that this sharp increase in rates could have a devastating impact on the broader economy, leading to a collapse in demand, especially as the Fed states that household surplus savings have been used up.

While the Federal Reserve’s staff does not currently see a recession on the horizon, Edwards predicts that the decline in demand he foresees will hurt corporate profits, potentially leading to layoffs and a downturn in the economy. He explains that the profit cycle, where business investments and jobs are slashed as profits fall, often causes recessions.

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Despite the positive second-quarter GDP growth of 2.4% and a decrease in jobless claims, Edwards remains bearish on the economy. He emphasizes that history shows people often give up on the idea of a recession just as it arrives, reinforcing his stance.

Edwards is not the only voice of caution on Wall Street. Marko Kolanovic, strategist at JPMorgan, believes that while it is challenging to pinpoint the timing of a recession, asset classes like commodities are still pricing one in. Kolanovic expects a downturn to occur in either the fourth quarter of 2023 or the first quarter of 2024. Mike Wilson, of Morgan Stanley, also shares the gloomy outlook. Despite admitting to being wrong about his previous bearish stance on stocks, Wilson argues that valuations are set to decrease, with the S&P 500 potentially falling about 8% to 4,200 by June 2024.

The common thread among the concerns voiced by Edwards, Kolanovic, and Wilson is the potential decline in corporate earnings. Wilson argues that falling inflation will lead to weaker pricing power for companies, resulting in lower revenues and profits. Edwards emphasizes that declining profits often lead to an increase in layoffs, which could ultimately push the economy into a recession.

While the overall economic data and job market seem robust at the moment, the warnings from these experts suggest a need for continued caution. It remains to be seen whether their predictions will come to pass, but the current signs do warrant keeping an eye on the possibility of an impending downturn. As with any economic predictions, time will be the ultimate judge.

• Economy
• Markets
• Stock Market