Rudi’s View: US Recession Debate Is Tightening

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 17 2023

In Weekly Insights this week:

-US Recession Debate Is Tightening
-FNArena Talks
-Australian Banks; One Chart

By Rudi Filapek-Vandyck, Editor FNArena

US Recession Debate Is Tightening

The Federal Reserve started lifting the Federal Funds Rate in March last year and, incredible but true, 14 months later the global financial world is still debating whether the US economy will experience negative economic growth, when exactly, or not at all.

Whatever the actual outcome, and irrespective of when exactly this question will have an answer, the long-winded, elongated trajectory of the current inflation-targeting process must have many an investor tune out by now.

There's only so much attention that can be spent on an event that has the financial world both worried and heavily divided.

Unfortunately, the definitive answer to that one crucial question comes with serious ramifications, either way, for equities and other risk assets across the globe. Probably no surprise thus, market trading volumes have thinned considerably and most indices are simply moving side-ways inside a lower volatility trading range.

We'd all like to know the answer, and move on, but that's not how it works. Plus there are now a few additional question marks to blur the outlook, ranging from the US debt ceiling, to the US banking sector, to China's uneven recovery, the RBA and the domestic mortgage cliff, and the ongoing war in the Ukraine.

One major change that occurred recently, and which could potentially mark an important turnaround pivot in a year-long negative trend, is forecasts for US corporate profits are no longer declining.

Break In Trend For US Profits?

Market forecasts in the US have been on a declining trend for approximately 12 months, but March-quarterly results released over the past weeks have broken the negative trend. The all-important question is now: what does this mean, exactly?

If you're bearish still, it's simply a pause. Economic indicators are pointing towards decelerating momentum into the months ahead. Inflation is falling, but still high. Corporate margins remain near an all-time record high. Once falling revenues combine with downward pressure on margins, watch out for the downside!

The alternative scenario is not necessarily a V-shaped recovery in the quarters ahead. Wall Street analysts are currently contemplating various scenarios for different segments of the US (and global) economy. Also because some analysts believe any recession on the horizon will prove to be of the rather mild variety, not the dreadful, fall-into-the-abyss format.

If correct, one potential outcome could be that share prices already have accounted for most of the potential downside in profits. Plus not every sector will be affected at the same time. The more sturdy, defensive sectors might not be affected at all.

Needless to say, the recent quarterly results season in the US has injected some renewed optimism into markets. This can partially explain why ongoing pressures inside the US banking sector have not been met with more selling. Economic data are deteriorating, but they remain inconclusive nevertheless about the economic path forward.

Bonds & Equities Not In Conflict

A lot of energy is being spent on the apparent discrepancy between US bonds and equities; the first is showing no intention to budge from its (implied) recession forecast, while equities, seemingly, continue to ignore the signal with the intention of powering on no matter what.

Not all is what it seems, however. For starters, indices are no longer trending higher, and certainly in the US most share prices remain in the doldrums with as little as ten stocks generating all the gains thus far this year. But look underneath the surface and one cannot escape the logical conclusion that the bond markets' signalling is increasingly mirrored by equities, as it is by commodities too.

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