The Question of the Hour: Are We in a Recession Right Now?

August 10, 2022 | 
Canaccord Genuity Tony Dwyer Tony Dwyer Monthly Picture Book

August Strategy Picture Book from Tony Dwyer, Canaccord Genuity’s Chief Market Strategist

Image representing this weeks blog are we in a recession right nowThe two most frequent questions we get are (1) “Is the economy in recession?” and (2) “Has the market made the low?” In “The fantastic four suggest staying out of the classroom,” we highlight how four widely followed macro indicators suggest it has been too early following the initiation of the rate hike cycle to expect negative economic growth. In addition, a cornerstone of our summer rally call was that economic expectations had become overly pessimistic given the post-pandemic momentum of the economy. Economists believe there is anywhere between a 3- and 18- month lag between rate hikes and economic impact, but the general view is 6-12 months. Since the initial rate increase following the Pandemic Recession was on 03/16/22, it seems unlikely we have felt the full impact of the rate hikes so far off the zero-bound level, much less a move to 3.5% by year-end.

The Fed has made it clear they do not want to make the mistake of the early 1970s when they reversed their tighter monetary policy at the first sign of an economic slowdown, which allowed inflation to become entrenched. As a result, it appears they will continue raising rates toward 3.5%, which increases the likelihood of recession:

  • Still-elevated inflation is forcing the Fed to maintain a hawkish policy stance, even if we have seen peak price pressures. Following the stronger-than-anticipated payroll employment report, the Fed is widely expected to hike rates 75 basis points at the September meeting despite emerging signs of slowing growth.
  • The Fed is again making a neutral rate assumption that is likely too high given the debt-driven backdrop. Fed Chair Volker’s forced recession in the early 1980s designed to reverse inflation took place with debt-to-GDP at a generational low point vs. today’s historic high.
  • Ultimately, economic growth and increased investing come down to money availability for corporations and households. Our favored gauge of real liquidity – readily available money minus what is being used for economic output – is pointing to a sharp economic slowdown, at best.
  • EPS assumptions remain too high for 2022, in our view, and valuation is unclear given the inflation backdrop. We are holding off on a 2023 estimate until later in the summer.

Summary

No reason to change our view. Early in the year we expected a transition in monetary policy and economic growth to create a tumultuous first half, followed by a summer rally, and then a test of the low in fall. The gains off the mid-June low have reached our summer rally target, but in our view it is important to remember the Fed is still raising short-term interest rates into a highly levered system with inventories building and softening demand. We believe the first leg lower this year was the fear of economic weakness given the rapid tightening cycle, and the test of the low may come with the reality of it. Whether we break from there or not will depend on the Fed. For now, although there could be a bit more upside, we suggest not chasing the market ramp and the more speculative sectors that led it.
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Tony Dwyer  | Analyst | Canaccord Genuity LLC (US) | TDwyer@cgf.com | 212.389.8216

Michael Welch  | Analyst | Canaccord Genuity LLC (US) | MWelch@cgf.com | 212.389.8217

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