US recession would be “good news” for markets, strategist says

A US recession could prevent a sharp market decline in the second half of 2023, according to Michael Yoshikami, founder and CEO of Destination Wealth Management.

US consumer price inflation eased to 4.9% year-on-year in April, the slowest annual rate since April 2021. Earlier this month, markets took new data from the Labor Department as a sign that the Federal Reserve’s efforts to curb inflation were finally taking hold. fruit

The headline CPI has cooled significantly since peaking above 9% in June 2022, but remains well above the Fed’s 2% target. Core CPI, which excludes volatile food and energy prices, rose 5.5% year-on-year in April amid a robust economy and persistent labor market tensions.

The Fed has repeatedly reiterated its commitment to fighting inflation, but minutes from a recent Federal Open Market Committee meeting showed officials split on where to go on interest rates. They ultimately opted for another 25 basis point hike at the time, bringing the Fed’s target funds rate from 5% to 5.25%.

Chairman Jerome Powell hinted that a pause in the hiking cycle is likely at the FOMC’s June meeting, but some members still see a need for additional hikes, while others expect a slowdown in growth to obviate the need for further tightening. The Central Bank has raised interest rates 10 times since March 2022, by a total of 5 percentage points.

Even so, the market is pricing in a rate cut by the end of the year, according to CME Group’s FedWatch tool, which puts a nearly 35% chance of ending the year on a rate target in the 4.75-5% range.

By November 2024, the market estimates a 24.5% chance, at the top of the bell curve distribution, that the target rate will be cut to a range of 2.75-3%.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Yoshikami said the only way that would happen is in a protracted recession, which he said was unlikely without further policy tightening as falling oil prices further fueled the economy. activity.

“This is going to sound crazy, but if we don’t go into slower economic growth in the United States and maybe even a shallow recession, that could actually be seen as a negative because interest rates may not go down or even go further. If that’s the case, it’s a risk for the market,” he said.

“Be Skeptical”

Yoshikami believes more companies are set to start guiding the market more conservatively on future earnings, expecting borrowing costs to stay higher and margins to shrink.

“For me, everything will really lead to him. Believe it or not, if that happens, I think it will be good news,” he said.

“If the economy avoids this and continues its bubbly path, then I think we will have some problems in the market in the second part of the year.

Federal Reserve officials, including St. Louis Fed President James Bullard and Minneapolis Fed President Neal Kashkari, have indicated in recent weeks that sticky core inflation could keep monetary policy on hold for longer and may require more hikes this year. :

Yoshikami said the actual rate cut process would be a “sharp move” despite market pricing, and suggested that policymakers may try to “massage” market expectations in a certain direction through speeches and public announcements, rather than final policy in the near term.

As a result of monetary policy and the tight path for the US economy, the veteran strategist warned investors to be “skeptical” about valuations in some market sectors, particularly technology and artificial intelligence.

“Think about it, look at it for yourself and ask yourself: Is this a reasonable stock given what we think earnings will be for the next five years? If it doesn’t, you put an optimism premium on that asset. which you’d better be damn sure of, because that’s where the tears really come from,” he said.