“I’m optimistic on US equities this year, but the biggest risk for stocks is if the Fed over hikes,” said Newton, who is monitoring whether the S&P 500 can stay above the December lows around 3,800. “Earnings this week from tech companies could be a huge catalyst. Other corners of the market are stabilizing. But if tech falls really hard, that’s a problem and the market won’t be able to broadly rally.”
Forecasters surveyed by Bloomberg are predicting that the economy will contract in the second and third quarters of this year.
While that would meet one standard definition of a recession, since 1979 the official arbiter — the National Bureau of Economic Research — hasn’t declared that such a contraction was underway until an average of 234 days after it started, data compiled by Bloomberg Intelligence show. So don’t hold your breath for a warning.
The stock market is far more likely to be a leading indicator for when a recession starts and stops. Equity prices typically point to the risk of a recession seven months before it starts and bottom out five months before it ends, according to data since World War II compiled by research firm CFRA.
“The S&P 500 may bounce back well before the announcement, as stocks typically rapidly price recessions,” according to Gillian Wolff, senior associate analyst at Bloomberg Intelligence.
While the S&P 500 has priced in an earnings decline, higher borrowing costs and persistent economic uncertainty will likely hold back gains in stocks over the next year, according to Bloomberg Intelligence’s fair-value model. BI’s base-case scenario puts the index around 3,977 at the end of 2023 — roughly unchanged from where it closed Friday. But if the bullish scenario plays out, BI estimates it could hit 4,896, a gain of some 23%.
Kevin Rendino, chief executive officer of 180 Degree Capital, is betting that the US recession has already begun. He’s been snapping up shares of small-cap stocks, specifically technology and discretionary shares that he sees at extremely low valuations.
Small-cap stocks are historically among the first groups to bottom before the broader market bounces higher. The Russell 2000 is up 6% in January, outpacing the big-cap S&P 500’s 3.5% gain.
“While everyone is running away, I’m running toward those hammered small-cap stocks,” Rendino said. “They’ll be the first to discount a recovery, and they’re already starting to do that relative to large caps. Investors are anticipating a recession, but whether we’re in one or not, we’re not headed for Armageddon.”
This article was provided by Bloomberg News.