Market expectations of recession skewed after last 2 downturns

  • Bank of America, Goldman Sachs, Morgan Stanley and other banks predicted a recession on the horizon.
  • But it’s too early to tell how serious it will be, and forecasts are likely skewed by the last two recessions.
  • Economists told Insider they don’t think a recession will be as severe as in 2008 or 2020, but it might not be mild either.

It’s been a bumpy year for markets as investors scramble to position themselves for a recession that many big banks say is all but certain. Bank of America, Goldman Sachs, Morgan Stanley and other big companies have called for a recession this year or next, with most analysts seeing at least a mild slowdown hitting the US economy.

But predictions of a “mild” recession are skewed by the experience of much deeper recessions over the past decade and a half, economists say, and it’s too early for market watchers to say a slowdown short-term potential will be slight.

“The last two recessions have really been extraordinary,” said Thomas Coleman, senior lecturer at the Harris School at the University of Chicago. He pointed to the 2020 pandemic-induced recession, which caused the S&P 500 to fall 28% from its peak, and the 2008 financial crisis, which sent the S&P 500 down 48%.

But as shocking as these experiments were, they were unique in their severity and market impact, Coleman told Insider. The last “normal” recession – or a downturn that didn’t involve a once-in-a-generation event or housing meltdown – happened in 2001, with the bursting of the dotcom bubble.

This has skewed the public’s perception of what a “normal” recession is, Coleman thinks, and may be leading some to forecast a “mild” downturn when it may not be.

The data is mixed on this. Inflation is showing small signs of slowing, although the Fed’s James Bullard hinted that the central bank still has a long way to go. The job market is hot, but that’s often before most recessions start, according to Bank of Montreal economist Douglas Porter.

“Things are still very fluid,” Porter told Insider. “I would actually push back against those who say if we have a recession it will be mild. I don’t think that’s obvious at this point here.”

Still, Porter and Coleman believe that even in the worst-case scenario, a looming recession won’t be as bad as the one that hit the economy in 2008 or 2020, raising hopes that investors can ride out a downturn if it does. occurs.

These storms were “caused by a very unique set of negative circumstances,” Porter said, and in general corporate balance sheets look much stronger than they did in 2008. The economy has shown its ability to continue despite a raging pandemic, and households are also protected by more cash savings than in 2008 or 2020.

“Even though it was a weird cycle, I think it would be more of a traditional recession, and I don’t think it would be as bad as 2008 or 2009, or as long,” Porter said.

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