Clear and Present Danger – JPMorgan CEO Jamie Dimon has warned of an impending economic disaster in the days ahead. Dimon warned that the US economy is on the verge of a recession and the stock market could fall another 20% from the current levels. S&P 500 is at around 3600 and it could fall to levels of around 2900 as a recession can hit the American economy in the next nine months, is what Dimon foresees.
Dimon warned that high inflation and rising interest rates, as well as the uncertainty surrounding the war in Ukraine, are “very, very serious things that I think will probably push the United States and the world – I mean Europe is already in recession – and they’re likely to put the United States into some kind of recession six to nine months from now. “
Dimon’s warning of recession is also a reflection of what the US Fed Chair Powell said during the Jackson Hole Symposium 2022 meeting in August where he warned of pain for individuals and businesses as a result of rate hikes to control inflation.
“Slowing consumer spending, decades-high inflation, weak productivity and tighter financial conditions have sparked growing concerns about a potential recession. The dynamics of the current economy, point to a recession characterized by affordability pressures for consumers, declining asset prices and declining corporate investment, not significant unemployment,” says José Torres, Senior Economist at Interactive Brokers.
But, what is recession and how is it defined? Recessions are marked drops in economic activity that can endure for several months or even years. When a country’s economy faces negative gross domestic product (GDP), growing unemployment, declining retail sales, and contracting income and manufacturing metrics over an extended period of time, experts declare a recession.
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After declining 1.6% in the first three months of 2022, the US GDP for the second quarter also decreased by an annualized 0.9%. However, other parameters are still not throwing up red signals, and hence there is still no official position on the US recession. In the US, it is the National Bureau of Economic Research that declares whether the US is in a recession or not.
Given the severe macro headwinds seen by investors around the world this year, concerns about the recession have dominated investor mood. In its haste to play catch-up and control inflation by aggressive monetary tightening, the Federal Reserve in the US runs the risk of derailing the strong post-pandemic recovery. While the central bank wants to create a “soft landing,” this outcome may not be as easy as it looks.
“Recession is the likely outcome in 2023 as the economy can’t handle the drastic shift from abundant liquidity and low rates to scarce liquidity and high rates. In my view, an economic downturn is likely in 2023 due to the difficulty in achieving a soft landing in general. Achieving a soft landing with inflation above 8 percent will prove even more challenging,” says Torres.
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How and till when the recession lasts, if at all US enters a recession, remains to be seen. The US stock market is already in the bear market territory and the impact of the 300 basis points rate hike is yet not visible in the corporate earnings and the economy. “Looking at business cycles, the documented economic recession phase could be characteristic of the late bear market phase. This may mean, in turn, that previously markets were in a bear market awaiting a recession. When this one actually shows up, the bear market may be in its final stage. Nevertheless, the bottom of a bearish market may also depend on how long the recession will last, how many quarters it will take, and how deep it will be,” says Daniel Kostecki, a senior market analyst, Conotoxia.