Polls Indicate that Recession Fears Are Climbing as the Markets’ Numbers Roll In


    April is typically the top month for the S&P 500. Stephen Suttmeier of Bank of America recently examined the data and discovered that the broad index grew 66 percent, with an average of 1.41 percent, going back to 1928. After a rocky start to the year, the S&P experienced its first negative quarter since the first lockdowns of the pandemic in 2020, when it dropped 4.95 percent. A large portion of investors walked into March hoping to see a stronger market.

    These expectations were shattered by the increasing awareness that the Federal Reserve (the Fed) will have to raise rates significantly more than was anticipated earlier in the year and that the speedier rise increases the possibility of a recession. The S&P has lost 8.7 percent on a return-to-cost basis. The Nasdaq was down 13 percent, dropping 23 percent since its November peak. The quantitative strategy of the Bank of America states it was the 12th worst monthly record since 1971. To make matters worse, it was impossible for investors to conceal the problems. Long-term Treasuries dropped. Gold was lower. Corporate bonds declined.

    CNBC published polling results on Tuesday that revealed the depth of the current pessimism. Fifty-seven percent of economists, strategists, and fund managers surveyed said they anticipate the Fed's increases to lead to a recession. However, it appears that the American public will have an opportunity to get ready for this downturn because those who predict the possibility of a recession are generally forecasting that it will begin in the month of August of 2023. Fifty-three percent believe that it will be moderate, and 43 percent think it will be light. Roger Ferguson, former Federal Reserve vice chairman, spoke to CNBC's Becky Quick, claiming that a recession is “almost inevitable.”

    Perhaps more shocking than the extremely high level of recession fears is the fact that the same survey found that analysts expect lower hikes than what markets are now pricing. The CNBC survey's respondents predict two 50-point hikes between May and June, which will be followed by a string of 25 basis-point hikes. The futures market for the federal funds rate is currently implying at least one additional 50 basis-point increase. The CNBC survey's respondents expect the Fed's goal to be hitting 2.25 percent by year's end and settling at a 3.08-percent rate before the month of August 2023. The futures market forecasts the possibility of a rate of 3 to 3.25 percent by the end of the year and rates of 3.5 percent or more by the end of summer 2023. However, this less optimistic forecast for rates is enough to allow the CNBC participants to predict a mild or moderate recession. This means that if the federal funds’ futures predictions are accurate, it could be that we'll experience a more severe recession.

    There is a possibility that the Fed will not take this planned path but instead slow down the tightening process earlier. It is likely that if unemployment starts rising and growth slows, there will be plenty of demands coming from the Biden Administration for the Fed to get its feet away from the accelerators. The last thing that the Democrats want is a recession that drags down the economy when Biden gets ready to run for reelection. If the Fed fails to reduce inflation and the economy is put at risk of falling into an ongoing double-digit increase, this could mean at some point even higher rates and more severe depression to help bring prices down to a level of stability.

    Investors will be paying close attention to what Fed Chairman Jerome Powell says at his next press conference. One of the most crucial tests is whether he admits that it is not feasible to create the “immaculate disinflation” scenario that will see inflation controlled without economic cost. If he remains with the positive image he presented in March, there is the possibility that the Fed isn't yet ready to reduce inflation through any means needed. It could send stock prices higher on the assumption that the Fed isn't as aggressive as it is currently being portrayed. But if Powell is clear that the Fed will fight inflation, it's likely that the anticipated blooming of the economy in May will have to be put off for a while.


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