The Stock Market Will Not Escape Another Recession, Strategists Predict

In the latest report from Longview Economics, the chief executive of a financial advisory firm that specializes in economic data, the chief executive predicts there is a recession coming in the U.S., and investors may be faced with some pain in the stock market as a result.

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He said that certain economic indicators, which he described as "pretty compelling" and "brutally bad", suggest that a recession could be on its way, according to a statement he made to Trade Algo.

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As reported on Thursday by the Conference Board, its Leading Economic Index for the United States declined by 1.2% in March, making it the lowest reading since November 2020, and fell back to its lowest level since February. According to the data, there appears to be a risk of economic weakness in the United States intensifying and spreading to other economic sectors.

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Watling added that in addition to this warning signal, it’s also common for the recession to happen within one to two years following the inversion of the Treasury yield curve, which first happened in March 2022, and then again in the months that followed.

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It has been a recession every time you have experienced that in the U.S. Hence, I believe that it is coming, and I believe it will be here soon. Watling explained that it was just a matter of timing.

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The International Monetary Fund, the largest of the developing nations, said only last week that it had been surprised by recent strength in U.S. consumer spending and labor market growth, in spite of many economists warning of a looming recession.

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A report released by the International Monetary Fund on April 11 forecasts that the world's largest economy is expected to grow by 1.6% this year, an increase from a forecast of 1% in 2022 that had been made.

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As Trade Algo reported, the IMF's first deputy managing director, said the IMF is optimistic about the U.S. economy and believes it can avoid recession if inflation data continue to cool. She added that despite the fact that a so-called hard landing was still possible, she still believed it to be a possibility.

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Expectations too high for earnings

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During a discussion on Friday, Watling was asked whether equity markets would be relatively unscathed if there was a subsequent economic downturn, to which he replied: “We don't think they'll be unscathed in our opinion. I'm not even sure if that's a good thing.”

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As per Watling's statement, the reality is that, when it comes to profit margins, they have reached record highs in 2021 and a little bit more in 2022. “When there is a lot of inflation around, you can be able to get very good operating leverage to achieve such high-profit margins," he explained.

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“It's important to normalize profit margins back to normal levels and then to factor in a recession when you get into a recession. In other words, you have to price in a recession when you get into a recession. Thus, my opinion is that the earnings expectations are way too optimistic and the stock market is likely to have to deal with that at some point in the near future.”

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