BNP Paribas Chief Market Strategist Daniel Morris says even though recession fears are rattling markets, it is still too early to assume there will be a recession and begin restructuring your portfolio.
In an interview, Morris said, “When we think of a recession, it’s really a collapse in demand and that’s absolutely not the situation we have today. Consumer demand is still strong, business investments still pretty good, and unemployment very low.”
Despite the recent inflation report coming in at 9.1% for the year in June of 2022, consumers are still spending robustly. On Thursday a Bank of America (BofA) Institute report showed credit and debit card spending increased 11% year over year last month. BoA internal data also indicates more spending and saving than there was pre-pandemic.
The labor market is also strong despite the financial tightening. According to the US Bureau of Labor Statistics, there were 372,000 jobs added in June, which beat estimates by 104,000. Unemployment was also steady at 3.6% for the fourth month in a row.
According to the National Bureau Of Economic Research, the entity which officially calls recessions, a recession is a, “significant decline in activity that is spread across the economy and that lasts more than a few months.” Technically Morris points out, that is a more complex definition than merely saying a recession is any economy which has two consecutive quarters of negative GDP growth, adding, “If you look at the recession that occurred after the dot-com bust in 2000, you did not have two quarters of negative GDP growth, but it was still classified as a recession.”
Morris does note there are two indicators investors should keep an eye on however – The Fed and the Labor market.
Morris noted, “What happened in the labor market and whether or not the Fed responds to the slowdown … kind of really that combination signals this was a recession.”
The minutes from last month’s FOMC meeting indicate the Fed is prepared to turn more hawkish on a moment’s notice if it feels it needs to. And after June’s CPI release showing a blistering 9.1% YoY rate of inflation, investors are now looking seriously at the possibility the Fed may choose to raise rates by a full 100 basis points in one go. CME Group’s FedWatch data, as of Wednesday, says there is a 44% likelihood of a 100 basis point hike at the July meeting of the FOMC.
However Morris and his team feel that as of now, there is little near-term risk of a recession.
Morris said, “We don’t really see [a recession] happening until next year, and that means the markets aren’t going to be pricing in that potential outcome for a while yet.”
