Dear Investors,
Blackrock don’t think equities are fully priced for recession. But we stand ready to turn positive via their assessment of the market’s risk sentiment or how much economic damage is in the price.
The labour market is still well equipped and the FED is in a good position to continue their way.
History shows that weakness in housing sentiment has led moves in unemployment (both to the downside and upside) quite well.
Does that guarantee that the unemployment rate will be near 9% a year from now? No; but it shouldn’t be lost on investors that housing’s track record of leading the economy is strong.
In fact, the Fed is expecting (pushing for?) a move up in the unemployment rate.
For now, the majority of labor pain has been witnessed in companies’ weaker demand for employees, including fewer job openings and more hiring freezes.
Moreover, with this tightening cycle we can see what damages could create over the long run on new home sales.
We are already at -25% in 2022 and the history shows us that we can arrive at -50% in the worst case.
As per recent research by the Federal Reserve Bank of San Francisco, when the FOMC “uses additional tools, such as forward guidance or changes in the balance sheet, these policy actions affect financial conditions, which the proxy rate translates into an analogous level of the federal funds rate.”
The Proxy Rate, shown below, “can be interpreted as indicating what federal funds rate would typically be associated with prevailing financial market conditions if these conditions were driven solely by the funds rate.”
New regime playing out
Get inflation back to 2% targets by crushing demand down to what the economy can comfortably produce now, or live with more inflation.
So recession is foretold. Signs of a slowdown are emerging.
But as the damage becomes real, Blackrock believe FED will stop their hikes even though inflation won’t be on track to get all the way down to 2%.