Abbey Road Investment Views, Apr. 2022

Recession risks are rising for 2023-4

• Investors have discounted some Ukraine war risks

• Central bank tightening is accelerating

• Stocks usually still rise in tightening cycles

• But the terminal rate is uncertain – see Focus p2

• Recession risks are rising for 2023-4

Overview

The worst environment for stock market investors is a recession, when markets typically fall anywhere from 20-60% or occasionally even more. Right now many investors are worrying about the near-inversion of the yield curve which historically has preceded recessions (see chart opposite). But 10 year yields have been rising strongly which points to robust economic growth, not recession. And indeed the inversion only applies to the 10Y-2Y year comparison. The spread of the10-year yield over the Federal Funds rate has gone up so far this year, underlining how late the Fed is in starting to tighten.

Currently the US economy still seems to have enough momentum to keep expanding despite high inflation eroding purchasing power. Wages are accelerating, employment is growing, there are accumulated savings of $2 trn from 2020-21 and high house prices underpin household wealth. All this is in stark contrast to the post-GFC environment in 2010-11 when balance sheets were weak and everyone was cautious.

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Abbey Road Investment Views April 2022

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