- The U.S. avoiding a recession could actually be horrible for stocks, TS Lombard said.
- Indeed, the Fed would likely keep interest rates high in a “no landing” scenario, which would weigh on equities.
- Fed officials aggressively raised interest rates last year to control inflation, a move that sent the S&P 500 down 20%.
The United States avoiding a recession would actually be “treacherous” for stocks, TS Lombard warned this week.
According to the research firm, investors could actually see more losses if the economy manages a “no landing” scenario, meaning the United States avoids a slowdown and recession and continues to stay strong.
Indeed, the Federal Reserve would likely keep interest rates high, when central bankers have traditionally cut interest rates by at least 200 basis points in the face of a recession, the strategists said.
Already, Fed officials have raised rates by 450 basis points over the past year to rein in high inflation. This caused the The S&P 500 loses 20% in 2022. Although most analysts have forecast interest rates to hit 5% this year, rates could climb to 6.5% if the United States avoids a recession, strategists have estimated.
“Far from being a benign scenario, ‘no landing’ could prove dangerous for investors, bringing back the market conditions that prevailed for most of 2022. The market would start trying to keep up with ever-increasing expectations again. in terminal rates. And that will likely lead to a prolonged devaluation of equities, undoing much of the multiple expansion actions enjoyed since last October,” TS Lombard said in a note on Wednesday.
The market has already given up some of its gains from earlier in the year as investors anticipate more rate hikes, with rates also staying higher for longer.
For its part, TS Lombard estimates that the United States could enter a mild recession by the middle of the year, echoing the forecasts of other Wall Street analysts. Indeed, economic data for February could show a much weaker economy, which can also tip quickly into recession, strategists said.
A slight drop could force the Fed to cut interest rates to 3% by the end of the year, easing financial conditions and boosting equities.
Other bullish market commentators argued for rate cuts, which would fuel a strong year for equities. Fundstrat’s Tom Lee said Fed officials could withdraw their monetary tightening efforts and no longer “crush the marketthis year, which could lift the S&P 500 to retest its all-time high.