By and large, market commentators now begrudgingly concede that the odds of a US recession occurring over the next 12 to 24 months are very elevated. Generally speaking, though, they stubbornly insist any downturn will be mild.
Such wishful thinking is “a spurious landmark we pass at this stage in the cycle before all hell breaks loose and both the economy and markets collapse.” That’s according to SocGen’s Albert Edwards who, on Wednesday, wrote that with both a recession and a market “meltdown” looming, “familiar phrases are returning to greet me like long-lost friends.”
One of those phrases is the contention that a recession, assuming it occurs, will be “shallow.” Another is the notion that stocks have already priced it in. As you can imagine, Edwards doesn’t agree with either.
It’s not just that the Atlanta Fed’s GDPNow tracker is sitting (un)comfortably on the flatline. “The leading indicators look grim as well,” Edwards said, citing the Conference Board, and noting that ISM has some catching down to do, specifically to sub-50, contraction territory.
He also mentioned last week’s update to the New York Fed’s DSGE model, which produced unofficial forecasts that are “considerably more pessimistic” (to quote researchers including Marco Del Negro) than they were just three months ago. Among other things, the model now sees a “not-so-soft landing,” characterized by negative growth this year and next (figure below).
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