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 is forcing the Fed to abandon its countercyclical policy, which could lead to a recession, but that is not our base case. 

   ● The Fed is bringing forward the rate-hiking cycle.
   ● As the persistent inflationary shock and tightening financial conditions weigh on economic activity and confidence.
   ● A mid-cycle slowdown remains the most likely scenario, as the business sector is in good health and the negative effects of COVID are fading.
   ● Private-sector balance sheets are solid, as are those of households, and the labor market is strong.
   
   

2. How out of control is inflation? 

   ● Despite the rise in realized inflation, the market still views the Fed as credible in its fight against inflation.
   ● It is still possible to make a case for some moderation in inflationary pressures. 

3. To what extent do assets and the economy reflect a recession? 

   ● Yield curves continue to indicate a moderate risk of recession.
   ● Data from the real economy show a growing—but still moderate—probability of a recession in the short term.
   ● Equity markets continue to price in a high risk of recession, unlike credit markets. 

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

   ● This recession would be driven by inflation, not by credit, and it would most likely be less severe than the previous three.
   ● And what about inflation-driven recessions? We do not believe that the analogies from the 1970s and 1980s apply now, even though inflation is at a 42-year high. 

5. Equities are already largely pricing in an “average recession,” and the market’s potential bottom may not be that far from the lows already reached 

   ● The S&P 500 typically falls by about 25% during recessions.
   ● Returns following previous bear markets have been favorable.
   ● In principle, we believe that base rates may already be reaching a “significant peak.”
   ● Opportunities in fixed income while maintaining high credit quality and a “more neutral” duration.

You can watch the webinar HERE and the presentation HERE.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker