Volatility has been the hallmark of the markets of late, with high inflation and the Federal Reserve (and other central banks) tightening monetary policy. One of the key questions in the market is whether the U.S. is headed for a recession. To discuss future scenarios, FYNSA hosted a webinar with FYNSA's deputy investment manager, Humberto Mora.

FYNSA's baseline scenario?

A mid-cycle slowdown remains the most likely scenario, as the business sector is in good health and the negative effects of COVID fade. Here are the main points of his analysis:

1. High inflation forces the Fed to abandon counter-cyclical policy, which could end in a recession, but this is not our base case 

   ● The Fed is front-loading the hiking cycle.
   ● As the lingering inflationary shock and tightening financial conditions weigh on activity and confidence.
   ● A mid-cycle slowdown remains the most likely scenario as the business sector is healthy and the negative effects of COVID fade.
   ● Private sector balance sheets are solid, as are household balance sheets and a strong labor market.
   
   

2. How out of control is inflation? 

   ● Despite the increase in realized inflation, the market still sees the Fed as credible in fighting inflation.
   ● It is still possible to build a case for some moderation of inflationary pressures. 

3. How much of a recession do assets and the economy incorporate? 

   Yield curves continue to indicate a moderate risk of recession.
   ● Real economy data show an increasing, but still moderate, probability of recession in the near term.
   ● Equity markets continue to price in high recession risk unlike credit markets. 

4. If there were indeed a recession, what would it look like? 

   ● This recession would be inflation-driven, not credit-driven and most likely this recession would be shallower than the previous three.
   ● What about inflation-driven recessions - we don't think the analogies from the 1970s and 1980s apply now even though inflation is at a 42-year high. 

5. Equities, already largely value an "average recession" and that the potential bottom of the market would not be that far off the lows already realized 

   The average decline of the S&P 500 is about 25% in recessions.
   Yields after previous bear markets have been favorable.
   ● We are tentatively inclined that prime rates would already be reaching a "relevant peak level".
   ● Fixed income opportunities while maintaining high credit quality and "more neutral" duration.

You can watch the webinar HERE and the presentation HERE.

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm