A U.S. economic recession could avert a sharp decline in the market in the second half of 2023, according to Michael Yoshikami, founder and CEO of Destination Wealth Management.
US consumer price inflation slowed to 4.9% year-on-year in April, the lowest annual pace since April 2021. Markets took new figures released by the Labor Department earlier this month as a sign that the Federal Reserve’s efforts to curb inflation are finally paying off. fruits.
Headline consumer price indexes have cooled significantly since peaking above 9% in June 2022, but are still well above the Fed’s 2% target. Core CPI, which excludes volatile food and energy prices, rose 5.5% annually in April on the back of a resilient economy and a persistently tight labor market.
While the Fed has consistently reiterated its stance on fighting inflation, the minutes of the last Federal Open Market Committee meeting revealed that officials were divided over interest rate policy. In the end, the Fed chose to raise rates by another 25 basis points at the time, setting the federal funds rate target between 5% and 5.25%.
Chairman Jerome Powell suggested a pause in the rate hike cycle was likely at the FOMC meeting in June, but some members still saw the need for more rate hikes, and weaker growth made further rate hikes unlikely. Some members anticipate that the need will disappear. Since March 2022, the central bank has raised interest rates 10 times by a total of 5 percentage points.
Nonetheless, the market is pricing in a rate cut by the end of the year, with an almost 35% chance of a year-end target in the 4.75-5% range, according to CME Group’s FedWatch tool.
The market has priced in a 24.5% probability of the target rate being cut to the 2.75-3% range by November 2024, at the top of the bell curve distribution.
Yoshikami appeared on CNBC’s “Squawk Box Europe” on Friday and said the only way that could happen is if the recession is prolonged, with further policy tightening as lower oil prices further stimulate economic activity. said it was unlikely without
“This may sound crazy, but if U.S. economic growth doesn’t slow, or even go into a shallow recession, interest rates may not be cut, or they may continue to be cut. , may actually be viewed as negative,’ and then go up. That’s the risk to the market,” he said.
Yoshikami believes more companies will begin to guide the market more conservatively on future earnings in anticipation that borrowing costs will remain high for a long time and margins will be squeezed.
“For me, it all boils down to ‘Is the economy going to go into recession?'” Believe it or not, I think it would be good news if it did,” he said. said.
“If the economy avoids it and continues its foamy trajectory, I think we will see some problems in the market later in the year.”
Fed officials, including St. Louis Fed President James Bullard and Minneapolis Fed President Neil Kashkari, have warned in recent weeks that core inflation persistence could lead to longer monetary policy tightening, necessitating more rate hikes later this year. It shows the view that it is possible.
Mr Yoshigami said the actual process of cutting rates would be a “drastic move” despite market pricing, and policy makers in the short-term were expected to focus on speeches and public hearings rather than eventual policy action. He suggested that the declaration could try to “massage” market expectations in a certain direction.
The bleak outlook for monetary policy and the U.S. economy has warned investors to be “skeptical” of valuations in certain parts of the market, especially technology and AI.
“Think, look for yourself, and ask yourself the following questions: Considering the expected returns over the next five years, is this stock reasonable? If not, are you optimistic about the asset? You’re going to put a premium on it, and that’s where the tears really come from, so you better think about it,” he said.