| As the economic new continues to deteriorate, global stock markets are now fully in recession-fear mode. Yield curves are flattening, credit spreads are widening, and equities are taking account of the worsening economic outlook and being de-rated accordingly. All of these signs are traditional recession alerts.
The US Central Bank is leading the fight against inflation with the Federal Reserve (Fed) adopting a proactive stance on increasing borrowing costs. The Fed increased interest rates at their June meeting by 0.75%, with another potential 0.75% increase in July and more upward revision beyond that.
The Monetary Policy Committee (MPC) of the Bank of England is following closely behind the Fed in tightening borrowing conditions, to try and reverse the decades high inflation the UK is facing.
The hardening attitude to fighting inflation was further signalled by the recent monetary policy U-turn from the European Central Bank (ECB). The ECB is now expected to raise interest rates a quarter-point in July, with additional and potentially larger moves in the Autumn. The ECB will now join some 80% of major central banks in raising rates in 2022.
All of this indicates a switch to an unambiguously hawkish stance.
A Global Recession is not a certainty but the actions of Central Banks in tightening monetary policy may create the environment where a recession becomes inevitable. The hope would be that any recessionary period is short and mild. Only time will tell if this is going to be the case.
What does this mean in terms of investment returns?
Looking at the shape of historical bear markets, (a bear market describes the environment where stocks fall more than 20% from recent highs), gives economists sufficient data to use statistical analysis to discern how financial and economic indicators perform immediately before, during and after slumps.
The following table (Source: Bloomberg and Wells Fargo 31.05.2022 – S&P 500) reviews the past 11 bear markets. |
