Soaring inflation may be pushing the US economy into a deep recession. Last week's 0.75% interest rate hike by the Federal Reserve -- the largest increase in nearly three decades, which aims to counter rampant inflation that hit a new 12-month peak of 8.6% in May. Crisis rang the bell of the finance market, when Elon Musk reported that he had a “super bad feeling” about the economy, and wanted to pause hiring and cut the company’s workforce.
It is indicative of the current mood — a lot of people have a sense that something’s just off in the economy, or it’s about to be. There’s this nagging sentiment that we’re in a precarious spot, that there’s some economic boogeyman lurking just around the corner.
You can add the World Bank to the growing chorus sounding recession alarm bells. In its latest outlook, World Bank president David Malpass said "for many countries, the recession will be hard to avoid." The prospect of higher short-term rates from the Fed has already led to a spike in longer-term Treasury bond yields this year. Mortgage rates have jumped as well, leading to worries that the housing market could slow dramatically.
Businesses are also grappling with higher costs for commodities and wages and now have to contend with higher interest rates potentially hurting their bottom lines as well.
Prediction for 2022
With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the July end of 2022 is now more likely than not. The persistence of inflation and a single-mandate Fed are among the factors that are driving the downturn. Despite the Fed’s significant hawkish pivot since November 2021, inflationary pressures have not eased meaningfully and may have arguably worsened.
Against that backdrop, we believe that the Fed’s efforts to realign demand with depressed supply to rein in price pressures will ultimately drive the economy into a mild recession. Fed officials have been unequivocally clear they will prioritize price stability, the frequently cited “bedrock” of the institution, above all else.
An opportunity to invest
When recessions strike, it's best to focus on the long-term horizon and manage your exposures, limiting risk and setting aside capital to invest during the recovery.
While no investor can hope to reliably time the onset of a recession or should respond by fleeing risk assets entirely, prudent diversification ahead of time can preserve capital and position you to profit from a recovery.
The sharp declines in stock prices that occur during a crisis or recession may present good opportunities to invest. Some companies may be undervalued by the market. Others may have a business model that makes them more resilient to an economic downturn.
On the other hand, there may be reasons to back off.
Financial markets tend to be cyclical with repeated patterns of expansion, peak, recession, trough, and recovery. Every recession so far has been followed by a recovery, but the recovery hasn't always been big or arrived soon.
Moreover, companies don't all perform the same at various stages of the cycle. Some may not recover from a recession for years. Others may not recover at all. If you invest, you may experience gains or losses. If you don't invest, losses will be off the table, but you may miss the early stages of a recovery, or inflation may erode the purchasing power of your cash over time.