The Fed is Fattening the Recession Tail
The Powell Fed's policies have been procyclical since the pandemic, their current approach is increasing recession risk.
Limbo
The next two weeks are likely to be difficult for the equities and fixed income markets, something of a period of limbo, with aftershocks from the third largest realized volatility spike in the last three decades like Wednesday’s 224bp S&P 500 and 464bp Nasdaq indices declines, reasonably probable. At the April 5 low, 5 days after the Trump Trade Shock, the S&P 500 was down 22%, reasonably close to the post-war recession related 24% decline. The median earnings decline for recessions is 14%, but our ‘sudden stop’ recessions, the 1980 Carter Credit Crunch and 2020 Pandemic Policy Panic earnings declines were 4% and 8%. In short, at the lows near 4800, a brief recession and shallow earnings contraction was pretty fully discounted. However, over the next couple of weeks a retest of the lows is possible due to fiscal and monetary policy sequencing and conflicts, negative earnings estimate revisions, and continued deterioration of business confidence surveys without definitive evidence of labor market demand weakening sufficiently to prompt a Fed policy pivot. If we get a retest, we will most likely be adding additional equity market exposure. With the S&P 500 at 5300, ahead of the unanswered policy questions and highly probable capital and labor investment, as well as earnings fallout from the business confidence shock, we are in no hurry to put money to work.
In this week’s note we cover the policy calculus, in other words the interaction of trade, spending, tax and regulatory policy and resultant increased recession risk. We also cover the fallout from the negative business confidence shock on output, prices, employment and earnings and investment implications.
