The sale of risky assets will continue. The recession will be short-lived and mild.
US monetary policy is an important determinant of financial conditions, not only in the United States, but also around the world. Markets believe that the US Federal Reserve will end its tightening cycle at or near the current level of interest rates: They estimate the peak of the key rate at 4.84%, just a nuance above the current target of 4.5%. This expected peak fell 15 basis points last week, and markets expect interest rates to fall towards 4% by early 2024. However, the Fed raised rates last week and , more importantly, changed its interest rate forecast for the end of 2023 to 5%.
Markets are bullish on interest rates as the consumer price index released last week was lower for the second month in a row. The Fed recognizes good news in the form of lower prices for energy, general goods and health care. His pessimism concerns the job market, which remains remarkably tight and the record gap between the wages of those who change jobs and those who do not. This huge discrepancy forces companies to increase the salaries of their employees so as not to lose them to their competitors.
This dilemma can be resolved in two ways: either the labor market relaxes, which reinforces the markets in their optimism, or inflation proves to be tenacious, which justifies higher interest rates from the Fed.
What does all this mean for the markets? In both scenarios, nothing good. If the US labor market weakens early next year and we enter a recession, consumers will spend less and profit margins will shrink. A 1% drop in profit margins equates to an 11% drop in earnings for S&P 500 companies. If the labor market does not weaken, the Fed will continue to tighten monetary policy, which is also bad for investors. markets.
We maintain our view that the sale of risky assets will continue. The end of the bear market is certainly not far away, but a decline of 10% is realistic. This could be a buying opportunity as we believe the recession will be short-lived and mild. We will see.
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