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The market pundits remain intensely focused on the question of whether the U.S. economy is in or about to enter recession, so we thought a piece on what a recession might mean for the stock market would be of interest. While Friday’s strong jobs report provides more evidence that the U.S. economy is not currently in recession, odds are still perhaps a coin flip or better that one may come in the next year. Here we update changing recession prospects and what that might mean for stocks.
That was quite a week. These days a Federal Reserve (Fed) policy meeting alone gets a lot of headlines and has market participants on the edge of their seats. Add to that the second straight quarter of negative gross domestic product (GDP) growth that exacerbated recession fears, the busiest week of earnings season, and important but sometimes under-the-radar inflation data, and last week was epic for market watchers. Here’s the good news: Markets liked it.
For the past year, supply-related problems contributed more to inflation than demand-related imbalances, but that may be changing soon. There are at least three factors that could change the course of inflation. First, the improvement in shipping and general supply bottlenecks could ease inflation. Second, strength in the U.S. dollar could offset some of the current inflationary pressures. And third, import prices have moderated since the beginning of 2022 and as import prices slow, we expect consumer prices to eventually reflect the slowdown in import prices.
Markets rarely give us clear skies, and there are always threats to watch for on the horizon, but the right preparation, context, and support can help us navigate anything that may lie ahead. So far, this year hasn’t seen a full-blown crisis like 2008–2009 or 2020, but the ride has been very bumpy. We may not be flying into a storm, but there’s been plenty of volatility the first part of 2022. How businesses, households, and central banks steer through the rough air will set the tone for markets over the second half of 2022.