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Liam Dann and Mike Taylor Talk Recessions – Are We in One? Are we headed for a recession and how do the markets react to a recession? Video / NZ Herald
Recessions are always bad news for the stock market.
But are we really in a recession? Are we going to just one? And what are the clues market investors should be looking for in the coming months?
History suggests that the average decline for the S&P500 during a recession is around 30%, Pie Funds CEO Mike Taylor told the Market Watch video show.
In a mild recession, that might be more like 20-25%, he said.
It’s close to the fall we’ve already seen this year. The S&P500 was down about 23% in mid-June.
Markets tend to be forward-looking and take a hit at the start of a recessionary cycle, Taylor said.
But what wasn’t clear, in this strange pandemic economy, is how far we’ve already come through the worst of the sell-off.
“If the recession were to turn bad – if it started to look like 1987 or 2008 – then we could expect further and significant losses for stock markets.”
Right now, although the US has had two quarters of economic contraction – the traditional benchmark for recession – it all looks pretty benign.
US jobs data surprised the market on Friday, showing 528,000 jobs were added in July as the labor market returned to pre-pandemic levels.
“It’s pretty hard to have a recession when you have full employment in a tight labor market,” Taylor says.
There were other buffers that kept the economy buoyant.
There had been a significant accumulation of savings during the pandemic due to government stimulus and people simply not spending because they couldn’t get out, Taylor said.
Despite the recent market decline, house prices were still up significantly since the start of the pandemic, so many consumers now had a larger asset base to draw on.
“So there are a number of factors that suggest we may not be in a recession despite everyone calling it,” Taylor said.
However, some indicators suggested that we could still be headed for a recession – or at least a deeper downturn.
Chief among these were interest rates, which rose at a historically rapid rate.
It has often taken several months for these rates to trickle down to the real economy, Taylor said.
“It takes time for people to drop their fixed rates, so it’s only when those mortgages are rolled over and people have gone from 3% to 6% that they really have to adjust their spending habits,” a- he declared.
“So I think there’s still a bit to bite on and maybe it will be later in the year.”
We had to be careful at this time because it just wasn’t clear which direction the data was going to go.
There had been promising moves in the fight against inflation with falls in oil, metals and food as well as shipping costs.
Bond markets – often described as the smartest and most forward-looking markets – seemed to have determined that yields had peaked.
US 10-year bond yields had fallen significantly – by 3.5% in mid-June
at around 2.8 percent right now.
“It’s the bond market saying interest has peaked,” Taylor said.
But it was simply too early to report that the market had bottomed out, he said.
Although we had the initial pain of the sharp rise in interest rates, there would likely be another wave as things started to bite in the real economy over the rest of the year.
This meant a strong possibility of a “second iteration” of the market meltdown in the coming months.
For stock investors, jobs data was now the key thing to watch, Taylor said.
“If the unemployment rate were to increase more than one percent, I think that would be quite negative for the economy and for stock prices.”
– The Market Watch video show is produced in association with Pie Funds.