A long and deep recession—which many prognosticators are warning about after the latest Fed rate hike—doesn’t have to be a losing event, according to three Capital Group investment professionals.
In fact, it could bring a needed and welcome reset to many areas of the economy when the long-term outlook is considered, they said. Just stay calm, like a well-trained pilot navigating a little turbulence.
“Let me start by framing it a little and using a Tolstoy quote: ‘Every unhappy family is unhappy in its own way,’” Capital Group economist Jared Franz said. “And every recession, too, is unhappy in its own way. At one extreme, the GFC (Great Financial Crisis) was a very bad, housing-centric type recession. That tends to be the most unhappy family. On the other end of the spectrum, you have in 2001 a fairly mild recession. So those are the barbells.”
Equity portfolio manager Justin Toner and economists Franz and Darrell Spence presented their interpretations of historical data and current Federal Reserve movements in Capital Group’s “Recession Watch,” held virtually yesterday.
The average recession, they said, typically lasts about 10 months with a 2.5% decline in GDP and a loss of nearly four million jobs, but many people who worked in finance in 2008 are still scarred by the financial crisis of 2008.
The trajectory of the recession that’s looming now, however, is very much dependent on inflation that seems to be becoming stickier and more persistent.
“That means rates will have to be higher to get rid of that inflation,” Franz continued. “When you think about a higher rate for longer, then that suggests perhaps a milder recession is not in the cards. But not a GFC either, so somewhere in the middle right, maybe, down 2% in GDP and let’s call it 11 months, 12 months in terms of duration.”
However, Franz cautioned that given the complexity of the global economy and the geopolitical issues involving China, Russia and Europe, a lot could happen to lengthen and deepen the general outlook.
Toner, who invests his portfolio in both equities and fixed income, said he thinks investors right now are in a very difficult position and will be for the next 12 to 18 months as the Fed continues to actively try to tame inflation. 2022 has already seen a 45-year exception, where both stocks and bonds have fallen in tandem, with a year-to-date decline of 19.5% in the S&P 500 and a 12.5% decline in the Bloomberg U.S. Aggregate.
“After watching the Fed presser yesterday and seeing what the Fed’s done with rates and looking at where the dot-plot is now, it’s clear the Fed is being very resolute,” he said. “Unemployment is still at a pretty low level, and core CPI remains very elevated, so I think we’re going to have a Fed that’s going to be very, very hawkish over the next 12 months.”