Is slack in the cards? Market watchers are divided over whether and when a recession will hit the US. Major US averages posted their 10th week of 11 losses last week on concerns that a cycle of aggressive interest rate hikes by the Federal Reserve to rein in high inflation would risk stinging the economy. deflation. The S&P 500 fell 5.8% last week, posting its biggest weekly loss since March 2020, while the Dow Jones Industrial Average fell below 30,000 for the first time since January 2021, losing 4.8% for the period. The heavy Nasdaq Composite was down 4.8%. Warnings of an impending recession are growing. A large number of investment banks – including the likes of Goldman Sachs, Morgan Stanley and Deutsche Bank – now believe that a recession has become the most likely scenario as the Federal Reserve raises interest rates and economic growth slows. But UBS stands by its base case prediction of “no recession”. “We don’t see a US or global recession in 2022 or 2023 in our base case, but the downside risks are clearly rising. Even if the economy slips into recession, however, it should be superficial given the strength of consumer and bank balance sheets,” he said. Strategists at UBS, led by Bhanu Baweja, in a research note on June 21. The bank looked at market and sector return patterns around 17 US recessions in the past 100 years as evidence of what might happen in a recession. History is certainly not necessarily indicative. What happens in a “shallow recession” Of the 17 recessions studied by UBS, 10 were considered “deep recessions,” when US GDP fell The United States increased by more than 3% from peak to trough. The remaining seven were categorized as “shallow recessions” – defined as a decrease in GDP of less than 3%. UBS noted that shallow recessions are associated with central bank rate hikes, usually in response to rising inflation. Bank data showed that shallow recessions typically last for 12 months, with returns falling an average of 11% over this period. He noted that sales typically start eight months before the onset of a recession, and bottom out within four months of the start. This means that the heavy selling in the market is concentrated in about the first third, with a recovery during the last two thirds of the recession, Bouja noted. On a sectoral basis, stock price returns for financial and industrial institutions and consumer discretionary stocks are notable for being “most sensitive” to the depth of the recession — the prospects of which improve further if one can be confident that a deep recession will be avoided, according to UBS. “In fact, around previous shallow recessions, financial stocks and consumer appreciation modestly outperformed the market,” Bouja added. UBS data also showed that, on average, the US inflation rate and the federal funds rate were 6.6% and 8.1%, respectively, before the shallow recession. After the Fed raised 75 basis points last week, the Fed’s benchmark funds rate now stands in the 1.5%-1.75% range. The US CPI rose 8.6% in May from a year ago, the highest increase since December 1981. Core inflation, excluding food and energy, rose 6%.