At this point, I would argue that traders and investors have somewhat decently priced in odds of a recession. As much as central banks are closing their ears to stick with raising interest rates, it seems inevitable that we will experience some form of economic slowdown over the next 6-12 months.
The question is, how bad are things going to be and will it last longer than just a few quarters? In other words, a soft landing or a hard landing – particularly for the US economy?
As equities continue to brave the storm clouds of persistently high inflation, central bank tightening and recession risks, it is tough to find comfort for a major turnaround in sentiment. But if a recession is what it takes to put an end to interest rate increases, that might turn out to be a strong tailwind for stocks to really turn the ship in the other direction.
If the pandemic is any lesson, it is that markets love easy money. And while we are not going to see such over-stimulus again from major central banks, a U-turn in the direction to cut interest rates will surely be a welcome development for equities. So, is a recession really bad news for equities? It depends but if we are to experience a rather shallow one – which seems to be the case in point for markets now, I reckon that’s reason enough for investors to start to regain confidence in risk trades.
This article was written by Justin Low at www.forexlive.com.