The outlook for the market and the economy that we laid out in our last quarterly note remains unchanged. Based on the trends we see in growth
and inflation, and Fed Chair Jerome Powell’s recent remarks, we now have higher conviction in the view.
To recap, our current base-case scenario is:
1. A greater than 90% probability of a U.S. recession in the next 12 months
2. A recession of moderate intensity: a greater economic contraction than the mild recessions of 1980, 1990 and 2000 (which is where the consensus is), but a lesser one than the severe recessions of 1973, 2008 and 2020
3. The U.S. unemployment rate to increase by three to four percentage points; economic growth to continue to decline into mid-2023; Real GDP to contract by two to three percentage points and nominal GDP growth to fall by more than six percentage points
4. The S&P 500 Index to trough below 3,000 and next 12 months (NTM) S&P 500 earnings per share (EPS) consensus expectations to trough at $180
5. Low-beta portfolios to continue to outperform while the economy decelerates, as they have thus far this year
The first four are included in the Conference Board’s Coincident Economic Index, which quantifi es economic activity that is broader in its scope than GDP. This index is produced monthly and is therefore a timelier indicator than GDP data, and we recommend investors monitor it regularly in the months ahead.
We assess U.S. recession risk using a combination of Conference Board’s Leading Economic Index (LEI) and Goldman Sachs’ Current Activity Index (CAI), and on that basis the U.S. economy appears to be sliding down the recession path. Based on our analysis of the recessionary and slowdown patterns of the past 50 years, the LEI growth rate has dropped to a level that suggests a recession probability of 70 – 80%. The CAI, which aggregates the breadth of current U.S. economic activity, has just turned negative. Given its low propensity for giving false alarms, our assessment of the probability of a U.S. recession, based on this indicator
alone, is now 80%. Based on all of the data, we believe the subjective probability of a U.S. recession in the next two to four quarters is over 90%—and we think it likely to arrive sooner rather than later.