Credit markets are more sanguine on recession risk, are they right?
CREDIT MARKETS ARE MORE SANGUINE ON RECESSION RISK, ARE THEY RIGHT?
Credit markets are more sanguine than stocks and Treasuries on the risk that the United States will fall into a recession, and they may be right again after having a better track record than other markets over the past two years, JPMorgan analysts led by Nikolaos Panigirtzoglou said in a report.
Panigirtzoglou notes that over the past two years whenever bonds or stocks priced in a high probability of a U.S. recession, credit markets were much less concerned.
“At the end it was credit markets that were proven right as no recession took place. And in the current juncture, while there is clearly elevated uncertainty in the near term as the Trump Administration has at least initially prioritized more disruptive polices, the risk is that credit markets are proven right once again,” he said.
Looking further into stock market moves, Panigirtzoglou finds that for the previous 12 recessions, the average peak to trough decline in U.S. small caps was around 33%, while the S&P 500 dropped 29%.
From the Nov. 2024 peak through March 11 the Russell 2000 small cap index fell 17%, implying a 52% probability of a U.S. recession. The S&P 500 is down 9.5%, indicating recession odds of 33%.
But JPMorgan notes that the recent move lower has been more driven by equity quant fund position adjustments and less by fundamental or discretionary managers reassessing U.S. recession risks.
Thus, “If US equity ETFs continue to see mostly inflows as they have thus far, there is a good chance that most of the current US equity market correction is behind us.”
(Karen Brettell)
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