We believe a recession is likely, which raises the question of what kind of recession and how will the markets perform. This is what I want to briefly cover.
While recessions can be painful, they can also be healthy as we work off excesses built up over the previous cycle. Typically, those excesses are related to credit and leverage. But we haven’t built up much in the way of excesses. While there are certainly weak pockets, in general US consumers and businesses are financially strong.
So while the Fed is likely to push us into a recession, it is unlikely to spill out into something larger. The credit dominoes too widely spaced. It will still hurt in places, but we see a milder recession overall.
Unfortunately, that doesn’t necessarily suggest a mild bear market for equities. We believe earnings are going to get ratcheted down. The S&P 500 index just hit all-time high profit margins last quarter.
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