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Recession Talk




March ended up being a pretty good month for stocks. What happens the rest of the year? Well, that’s largely up to the Fed’s decision on future interest hikes.


There is a wide variety of opinion on the subject, ranging from several more hikes to a pause, and even cuts in the second half. Fed policy makers are all over the board too. As we go to press, 10 Fed officials see one additional 25-basis point hike in 2023, indicating a peak (or terminal) rate at approximately 5.125%. Three Fed officials see two additional hikes this year, three members see three more hikes, and one sees four more. Only one policymaker sees rates currently at their peak. For perspective, before the banking crisis it was looking like the Fed Open Market Committee would push the rate up by 50-basis points in March, and another 25 or 50 later this year (putting the terminal rate at 5.625%).


One additional hike, likely in May, would be consistent with our forecast in the January 2023. At that time, we anticipated the Fed hiking by 25-basis points each in February, March, and May. This view is looking pretty good, and we’re sticking with it. This is important because the threat of higher interest rates is the stock market’s kryptonite.


But why will the Fed pause soon? A couple reasons. First, inflation is heading in the right direction (although it is not declining as fast a everyone wants). Second, the recent bank failures will serve to do what the Fed is trying to do, tighten credit. Some analysts feel that banks pulling back on making loans will have the same effect as 150-basis points of Fed hikes. Fed hikes, which work with a significant lag, appear to be getting their desired effect.


If we get 25 bps in May and then a pause, the softlanding scenario (where the economy is not forced into a significant recession and the Fed keeps credit just tight enough to reduce inflation) remains a possibility. This would create conditions that are as good as can be for stocks.


Could the recent stress on the banking sector work out to the individual investor’s advantage? Alffonzo Peccatiello of “The Macro Compass”, a former institutional money manager, described the concept of the problem in banking being disinflationary, thus slowing down the Fed interest rate hikes that have been rattling the markets.


Peccatiello expects a “ton” of volatility in the months ahead and he is calling for a “disinflationary recession.” We’ve spent a lot of time discussing the “R” word. The question always comes back to, will it be shallow or deep? We still believe chances are any recession, if we actually have one, will be shallow.

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