Global Courant 2023-04-21 16:57:34
According to the CEO of financial advisory firm Longview Economics, the latest US economic data suggests that a recession is on its way and investors may need to prepare for some stock market pain.
Speaking to CNBC’s “Squawk Box Europe” on Friday, Chris Watling said he believed a recession was on the way, citing what he described as “pretty convincing” and “ruthlessly bad” leading economic indicators.
The Conference Council on Thursday said the Leading Economic Index for the US fell 1.2% in March, falling to its lowest level since November 2020. The data seemed to indicate that economic weakness could quickly intensify and spread across the entire US economy.
In addition to this warning sign, Watling said the typical timeline for a recession following the inversion of the Treasury yield curve, which first reversed in March 2022 and then again in subsequent months, was about a year.
“Any time you’ve had that in the US, you’ve had a recession. So I think it’s coming, it’s coming. It’s just a timing issue,” Watling said.
While many economists have warned of an impending recession, the International Monetary Fund last week suggested it was surprised by the recent strength in the US labor market and consumer spending.
The IMF released its latest World Economic Outlook report on April 11, saying it sees the world’s largest economy grow by 1.6% this year, up from its forecast of 1% in 2022.
Gita Gopinath, the IMF’s first deputy director, told CNBC’s Joumanna Bercetche last week that signs of declining inflation rates had given the fund reason to believe the US economy could avoid a recession. However, a so-called hard landing was still “within the realm of possibility,” she added.
Earnings expectations ‘much too optimistic’
Asked on Friday whether stock markets would come through an expected economic downturn relatively unscathed, Watling replied, “I mean, they’re not going to come through it unscathed in our opinion. I’m not even sure relatively.”
“The reality is if you look at profit margins, they went to record highs in 2021 and a little bit in 2022, and obviously if you have a lot of inflation, you can get very good operating leverage so you can get record high profit margins. Watling said.
“If you go into a recession, we have to take a double whammy on profit margins. You have to normalize them back to normal levels and then you have to price in a recession. So I think the expectations for earnings are way too optimistic and that’s why the stock market will have to deal with that at some point.”
– CNBC’s Karen Gilchrist contributed to this report.
