Fear, Uncertainty, and Doubt or F.U.D. in stock market parlance works just opposite of the F.O.M.O. or ‘Fear of Missing Out’ investor sentiments. And, currently, the F.U.D seems to have overpowered the investor sentiments to some extent.
S&P 500 index is down by just about 2.5% over the last 3 months while the YTD fall is almost 23%. Meanwhile, the investor and traders community is uncertain whether to go long or short in the market given the data pouring in.
Lisa Shalett, Chief Investment Officer, Wealth Management in a recent note echoes this view, “Conflicting signals from economic data are compounding investors’ uncertainty. On one hand, leading indicators, such as Treasury yield curves, suggest the increasing likelihood of a recession in the year ahead. On the other hand, lagging indicators such as retail sales, manufacturing-activity gauges, and labor-market data suggest potential resilience in third-quarter earnings results and a pickup in economic growth.”
The only thing that seems to be clear is the Fed’s aggressive approach but even that may change in the quick time given the cooling of inflation. The risk of recession is staring in the face and how impactful could be the US recession once it is officially declared by the government remains to be seen.
Sheraz Mian, Zacks Research Director shares his views on the outlook for the U.S. Economy:
The Fed has been in tightening mode for a while now, but the unequivocally tough message since Jackson Hole took concrete shape after the recent FOMC meeting. Everyone in the markets appears to have finally ‘received the memo,’ with those looking for the central bank to pivot, finally accepting the inevitable, at least for now.
The pain that the Fed Chair warned us of in Jackson Hole was already a reality of life for key parts of the economy like housing, cryptos, SPACs, the M&A/IPO markets and much more.
The bitter medicine that the Fed is determined to administer will spread the pain all around, further diminishing the odds of the so-called ‘soft landing.’
One anguished analyst from one of the money-center banks described the outlook for the U.S. economy in the wake of the recent Fed meeting as having one foot in the grave and the other on a banana peel.
I don’t think the economic outlook is really that dire, given the multi-decade low unemployment rate, rock-solid household and corporate balance sheets and a well-capitalized financial system.
I am not suggesting that these sources of strength will stop the U.S. economy from falling into an economic downturn, but rather that these foundational strengths will help it navigate these headwinds better.
Most recessions are caused by the Fed, with the primary culprit being the central bank’s inability to accurately gauge, in real-time, the extent of tightening needed to curtail aggregate demand in the economy. The Fed’s tougher posture increases the odds of that history repeating itself.
That said, if we do get into a recession, it will most likely be of the garden variety type, and not what we experienced in the global financial crisis.
The key takeaway here is that estimates have already been coming down. Yes, there may be some more cuts ahead, but to suggest that earnings estimates have to massively come down to reach a ‘fair’ level implies that we are projecting a global financial crisis type of economic event on the horizon. I don’t think we are headed in that direction for the reasons I stated earlier.
As such, I strongly believe that the bulk of the negative estimate revisions is likely behind us. We are closer to the end than the beginning.