The Wall Street Journal reported that “financial markets suffered ‘terrible’ losses in the first half of 2022, noting that ‘things could get worse’.”
And in In its report, The Wall Street Journal explained The first six months of 2022 were full of surprises such as inflation, the biggest bond sale in four decades, falling tech stocks, and the domestic collapse of cryptocurrencies, noting that “the looming danger that investors have been ignoring for months is a recession, and what whether the economy will collapse or everything will be fine remains unknown.”
Efforts to estimate the likelihood of this vary from the 90% in a survey of Deutsche Bank customers to the 4.11% false accuracy of the New York Federal Reserve’s recession forecasting model.
The report pointed out that “while investors are finally focusing on a state of ‘uncertainty’ about a recession, risks elsewhere in the world could also hurt US investors”, noting that “Japan may finally have to step back and let bond yields grow. leading to an increase in bond yields. This will absorb the cash that the country’s investors are pumping out of the country.”
“In Europe, the central bank has promised a new plan to support Italy, but we have seen this proposal before, if it follows the “too little too late” scheme, we may see the return of the eurozone debt crisis, which is something that the markets are not preparing for. “, he said.
The Wall Street Journal added that “almost any economic outcome is likely to come as a new surprise, and that if there is a weak decline, then stocks should do well in a panic reversal after the last recession, and if there is a recession, it could easily be a big loss.” Looking ahead, only the decline in recent weeks appears to be related to recession risks.”
The report indicated that there was a small piece of good news, namely that “prices have already fallen heavily, which brings them closer to where they will eventually come to”, noting that the “S&P 500” fell the most in the first half. years after losing 21% in 1970 when the economy was in recession and long-term Treasuries lost 10% even with coupon payments, the biggest loss in six months since Paul Volcker’s Federal Reserve pushed the economy into recession in 1980 year. “.
“There is no reliable way to know how likely the market is to hope the Federal Reserve will push the economy into recession this time around,” the newspaper reported.
“The easiest way to extract probabilities from price action is to compare price declines to the average peak-to-trough declines of previous recessions,” Nikolaos Panigerzoglou, a strategy analyst at JPMorgan, was quoted as saying by the Wall Street Journal. fell just over 20%, and the average drop over the past 11 recessions was 26%, so that suggests a recession is about 80% likely.”
However, most of the selling this year has not been related to recession risk, and to find out, we need to distinguish between the direct and indirect effects of the Federal Reserve on stock and bond prices. Tech” and that was what dominated until June when bond yields were rising and growth stocks were crashing while cheap “value” stocks were mostly good and if we exclude the tech sector to eliminate most of this effect . economically sensitive cyclical sectors of the stock market was just below their protection by June 7th, then everything changed and investors woke up to the Fed’s indirect effect of weakening the economy, which is almost the opposite effect on asset prices. This means that a weaker economy has less inflation than others, which justifies lower bond yields and also affects profits, especially for cyclical companies, which tend to hurt relatively low-valued stocks. More than stock growth, according to the Wall Street Journal.
Since June 7, cheap stocks have been hit hard and cyclical sectors have fallen, especially oil and mining stocks, as recessionary fears have also sprung up in Treasuries over the past two weeks as investors bet the Fed will have to cut interest rates. aggressively throughout the year The decline of almost half a percentage point in the treasury in 10 years is the largest in this period since the first closure due to the Corona virus, according to the newspaper.
The newspaper pointed out that “markets are now aware that the outlook is dim”, explaining that “there are clear risks that could be imported from abroad” while “hedge funds are betting big on the Bank of Japan” as it will relinquish its control of bond yields, which they protected it from global monetary tightening and the fall of the yen, and if the hedge funds are right – and there is no pressure on the BOJ to act – Japanese bond yields will jump and the strong weakness of the yen will turn into counterproductive and unstable markets around the world.”
Higher yields domestically, as well as potential currency losses, will encourage Japan’s army of small investors to bring their money home, driving the yen up and down elsewhere, increasing upward pressure on Treasury bond yields,” noting that “ risk from Europe is habitual, and this is politics.”
The report added: “The European Central Bank acted early to avoid the Italian government’s financial crisis and now faces the difficult task of persuading the humble North to accept a deal that guarantees government bonds without imposing unacceptable conditions on Italy if it fails to get enough funds , it could collide with Italy and the Eurozone by autumn again become a serious problem.
He said “economic recession data is heading in the wrong direction and high interest rates have not yet begun to affect ordinary families,” stressing that “the risks are high and the markets are not yet ready.”
Source: Wall Street Journal.