Consensus View Of ‘No Recession.’ Could It Be Wrong?

As portfolio managers, we ask ourselves daily if the consensus view of a “no recession” scenario is wrong. Unfortunately, while the technical backdrop supports a bullish trend, there remain substantial risks to that view.

Substantial Risks to the “No Recession” Scenario

Recent events, such as the Silicon Valley Financial (SIVB) debacle, show that risks can arise suddenly, turning previously bullish sentiment bearish. A tighter monetary policy is extracting liquidity from the banking system, creating problems for overleveraged banks. In addition, the Fed is pulling central bank money out of the system by not reinvesting payments and resorting to reverse repo operations. In the past, contractions in nominal M2 have coincided with financial and market-related events.

While some consider SVB an isolated event, the market’s rally since last October is based on a consensus that earnings will bottom in the second quarter of this year and improve into year-end. If this view is correct, the market’s rally is logical, as markets generally lead to fundamental changes. However, the consensus view contradicts much of the macroeconomic data.

What Does the Macro Data Say?

Most Wall Street banks expect a “no landing” scenario, fueled by the expectation that the Fed will “pause” its rate hiking campaign and the economy will avoid a recession. However, recent economic data, such as a strong jobs report, a 0.5% increase in inflation, and a solid retail sales report, suggest the Fed has no reason to pause anytime soon. The current base case is that the Fed will move another 0.75%, with the terminal rate at 5.25%.

Given this rhetoric, it’s tough to believe in a “no landing” scenario, nor does it indicate that the Fed will be cutting rates anytime soon. Instead, the only reason for rate cuts will be if we enter a recession.

Related Facts

• The market has broken above both weekly moving averages and held its long-term bullish trend line.
• Both sets of weekly Moving Average Convergence Divergence (MACD) indicators have registered buy signals from levels lower than during the financial crisis, the most critical bullish signals.
• SVB’s troubles are, so far, isolated from the rest of the banking system.
• Most of Wall Street expects the earnings to recover to where they were at the bull market’s peak in 2022, but that view is at odds with much of the macroeconomic data.

Key Takeaway

The consensus view of a “no recession” scenario remains at odds with much of the macroeconomic data, and there are substantial risks to that view. As portfolio managers, we must monitor the technical backdrop and remain agile in our investment strategies to weather these risks.

Conclusion

Whether the consensus view of a “no recession” scenario is wrong or not continues to be critical, and recent events have shown us that risks can arise suddenly. Therefore, investors must remain vigilant and not become complacent in their investment strategies, always prepared to shift course if needed.