United States: Is the probability of recession increasing? What will happen to the shares?

United States Recession
  • On Wednesday the Federal Reserve increased the interest rate by 75 basis points and projected to reach a ceiling of 4.6% by the end of the year.
  • The markets reacted with a pronounced sell-off and now analysts believe that the Fed’s decisions increase the chance of seeing a recession.
  • Experts also believed that stocks could experience a rebound during the fourth quarter of this year, due to the November 8 midterm elections.

Investors listened carefully to Fed Chairman Jerome Powell’s speech and interpreted that the Federal Reserve will not abandon its aggressive policy and that it is willing to reach a recession in order to beat inflation.

Yesterday, the Fed raised interest rates by 75 basis points for the third consecutive time, taking it to a range of 3%-3.25% and affirming that the ceiling will reach 4.6%, well above the previous forecast. of 3.8%.

 “The extent of the aggressiveness that the Fed is signaling really surprised us. This is very consistent with the recent shift in Fed commentary, and it certainly sounds like a Fed that is absolutely fine risking a recession, reducing inflation with tight monetary policy.”

Mark Cabana, head of US short-term rates at Bank of America.

According to Cabana, the Fed is likely to raise rates by 75 basis points in November (it would be the fourth in a row with this figure) and 50 points in December.

Despite the aggressiveness, Cabana believes the Federal Reserve is taking the right steps as inflation has started to fall.

“Basically, they are saying that rates have to go up faster and faster and even if we have cuts in 2024 and 2025, they will still be tight until 2025. It won’t make them neutral again until 2025. That’s three years of tight policy.”

John Briggs of NatWest Markets.

Following Powell’s speech, 2-year Treasury yields rose while 10-year and 30-year Treasury yields ended lower, signaling a recession signal to experts.

“I think the main takeaway I see is really reflected in the market. You have a deeper investment. The answer we are seeing is that when you peel the onion, the market is showing you that there is more concern about a slowing economy and recession risks that we agree with. The risk of recession is greater in the next year”

Keith Lerner, chief investment officer at Truist.

What can happen to the shares?

In that sense, Lerner stressed that the economy is already slowing down, so investors should increase quality and stay on the defensive because a recession would mean cuts in company profits.

Another point that Lerner highlighted and that could put pressure on stocks is the “attractive” yields in the fixed income market.

Sam Stovall, the chief investment strategist at CFRA, is more optimistic than his colleagues, believing that the fourth quarter will be good for stocks due to the November 8 midterm elections.

“I’m not giving up on a fourth-quarter rally. I think the market will breathe a sigh of relief and start to feel better when the Fed puts a brake on their policies.”