'Recession risk has risen dramatically': A Wall Street expert warns the coronavirus-induced market meltdown is just getting started — and says policy responses are way behind the curve
Chun Wang, portfolio manager at The Leuthold Group, thinks a recession could grip the US economy in as little as six months. He says the coronavirus accelerated a weakening market trend, and thinks "there is more downside to come" before all is said and done. Wang says the Federal Reserve missed a golden opportunity to calm markets by cutting interest rates by 100 basis points, and now its influence may be limited going forward. Click here for more BI Prime stories.
The speed and ferocity with which global markets have deteriorated is astonishing. In just a handful of trading sessions, fears of a global pandemic cratered stocks worldwide, ending history's longest bull market. "Recession risk has risen dramatically over the last couple months," said Chun Wang, portfolio manager at The Lethold Group, on "Money Life with Chuck Jaffe, an investing podcast. "We could be looking at recession within the next six or 12 months." He continued: "It really depends on how long and how severe this limbo is going to last." When Wang refers to "limbo," what he's referencing is the level of ambiguity surrounding the coronavirus' impact on the economy. Right now, he thinks the potential outcomes are fraught with uncertainty — and policy makers aren't helping the cause. "One thing we can say for sure is that it's unlikely to get a lot of clarity anytime soon regarding the coronavirus — and that's probably a fact," he said. "On the other hand, we know for a fact that policy responses so far have been behind the curve, especially on the part of the Fed." Although the Federal Reserve surprised markets with a 50 basis point interest rate cut last week, it did little to stop market turmoil. Wang thinks the gesture was too little, too late — and he says the Fed's maneuver was a missed opportunity to "shock and awe" the market by cutting interest rates by 100 basis points. "You got to get in front of the curve — get ahead of the curve to actually provide any benefit in terms of stabilizing market sentiment," he said. "I don't think we're going to see anything like that." To Wang, markets were starting to deteriorate long before the coronavirus hit the headlines. He says that weakness in cyclical stocks, value stocks, small-cap stocks, and emerging markets was palpable before panic started to spread. The prevalence of the coronavirus took a trend that was already in place and exacerbated it at the worst possible time. "We basically think coronavirus is an accelerator, not a catalyst," he said. "Basically, we think if consumers and businesses — like you said, hotels — change their behavior and start to pull back, we could be looking at recession within the next six or 12 months." With all of that under consideration, Wang thinks it's still too early to say that a bottom in stocks has been carved out. "We think there is more downside to come," he said. "Valuation, on one hand, is still too high to provide a safe, longer-term entry point — and the technical picture, on the other hand, has deteriorated enough to point to a weaker trend going forward."SEE ALSO: 'A nuclear f---ing warhead': A former hedge-fund manager says coronavirus panic will bring the global economy to its knees — and a depression is now his 'base case' Join the conversation about this story » NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption
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Billionaire investor Marc Lasry says the market isn't pricing in a recession that will last 'for a while'
The US will be stuck in a recession "for a while," and the stock market isn't...The US will be stuck in a recession "for a while," and the stock market isn't currently priced for that outcome, Avenue Capital CEO Marc Lasry said Thursday. "It's going to be a hard couple years" as unemployment fails to recover and an economic rebound sputters, he added in a CNBC interview. The billionaire still sees markets returning to past highs down the road, saying the market is "correct" to project "great" earnings in 2022. Visit the Business Insider homepage for more stories. The stock market is in for a rude awakening once investors fully realize how long the coronavirus recession will last, Avenue Capital CEO Marc Lasry said Thursday. While the equity rally from recent lows has slowed, prices are historically high relative to expected profits. Several market experts fear the fragile rally can easily collapse under a second wave of coronavirus cases or a delayed surge in bankruptcies. Lasry is the latest to join the fray, cautioning that the US will be in a recession "for a while" as the pandemic's fallout lingers. "I think sooner or later the market will realize that," the billionaire investor said on CNBC. "I think it's going to be a hard couple years." Read more: 'It works for anything I look at': BlackRock's bond chief who oversees $2.3 trillion shares the 'really simple' 3-part framework that guides every investment decision he makes — and outlines 2 factors he looks for in a company Much of the country's recovery hinges on an uptick in spending, and Lasry fears soaring unemployment and diminished consumer confidence will delay such a rebound. Jobless claims data released Thursday revealed another 2.4 million Americans filed for unemployment benefits last week, bolstering fears that the second quarter will post the current downturn's bleakest readings yet. While roughly 18 million Americans currently classify their joblessness as temporary, Lasry thinks that proportion will shrink as companies fail to take workers back. The trend will cut into consumer spending and further delay an upswing, he said. "If you're going to have all these people unemployed, it's hard to end up coming out of a recession until that changes. It's going to be a difficult couple years," Lasry said, adding "I just don't see people that are out of work spending money." Read more: Multiple readings of the stock market's future are near their worst levels ever. UBS says that's set up a 'significant recovery' — and lays out a 2-part playbook to profit from it. Despite his gloomy outlook, the hedge fund manager still sees an end in sight. Several companies have pulled earnings guidance due to the coronavirus threat and uncertainties sourced from the pandemic, but those still issuing forecasts suggest profits will take years to normalize. Certain companies will emerge as winners during the nationwide lockdown, but the broad market will rely on containing the virus and slowly bringing industries back online, Lasry said. "At the end of the day, the market is saying earnings are going to be great in 2022. I don't disagree with that. I think that's actually correct," he added. Now read more markets coverage from Markets Insider and Business Insider: Treasury Secretary Mnuchin sees 'strong likelihood' that further stimulus is needed as Senate spars over new bill Bank of America lays out a bullish scenario where US stocks surge 14% over the next year These 11 stocks loved by hedge funds have beaten the market during both the coronavirus collapse and its subsequent recovery, RBC saysJoin the conversation about this story » NOW WATCH: Tax Day is now July 15 — this is what it's like to do your own taxes for the very first time
The stock market climbed for a second straight week, ignoring gloomy economic forecasts and bleak data...The stock market climbed for a second straight week, ignoring gloomy economic forecasts and bleak data as traders find a silver lining in the Federal Reserve. In recent weeks, the Fed has used both old and new programs to ensure credit flows where it's needed, signaling to investors that the public health crisis won't necessarily translate into a financial-market collapse. While the central bank's spate of relief efforts haven't directly lifted stocks, the policies "definitely had ripple effects into the equity market, no question about that," said Liz Ann Sonders, chief investment strategist at Charles Schwab. The Fed's policies "precluded the prospect of a complete economic collapse," leading traders to revive their risk-on views, Goldman Sachs analysts said in a recent note. Visit the Business Insider homepage for more stories. The stock market seems unshaken as signs of a deep coronavirus recession pile higher and higher. As quickly as the S&P 500 spun out of its 11-year bull run, it's soared out of bear-market territory and surged 29% in just over three weeks. This recent divergence between stocks and the economy has been jarring. How is the market so nonplussed by the mounting recessionary wreckage? Look no further than the Federal Reserve. Over the last several weeks, the central bank has shown it will go to unprecedented lengths to stimulate the economy and prevent further market disruption. Those signals have, in turn, stabilized stocks and allowed them to retrace a significant chunk of their post-coronavirus loss. Put simply, the Fed has been indirectly backstopping the stock market by reducing investor worries around how much the coronavirus lockdown will hurt corporate profits and strain outstanding debt. More than ever before Monetary relief efforts kicked off in mid-March when the Fed announced plans to inject up to $5 trillion into stressed money markets. Days later, the Fed slashed its interest rate close to zero for the first time since the financial crisis. In the following weeks, the authority created lending programs for small employers, households, and large businesses to aid cash flow. Purchases of Treasury bonds and mortgage-backed securities added additional liquidity to the crashing markets. Read more: 'I've gone to cash': Mark Cuban outlines his coronavirus investing strategy ahead of another 'leg down' in markets — and says now is the time to buy real estate The Fed announced a $2.3 trillion package on April 9 to bolster lending and begin buying corporate debt across a range of credit ratings. The policy salvo surpassed the Fed's entire financial-crisis playbook in a matter of weeks. Stock prices continued ticking higher over the period, with traders cheering relief programs as an indirect safety net for the battered equities market. The central bank was responding to a historic glut of negative economic data, all of which points firmly to an imminent recession. Many experts have said the US is already mired in one. Unemployment claims made over the past four weeks have nearly erased all jobs created since the financial crisis. Retail sales plunged by a record 8.7% in March as the virus kept shoppers at home. Consumer comfort suggested weak revenues were still to come as Bloomberg's index slid to its lowest level since before President Donald Trump was elected. The International Monetary Fund projected on Wednesday the world economy would shrink by 3% in 2020, making the "Great Lockdown" the most severe recession in nearly one century. The economic downturn could even last through 2021 in the event of a COVID-19 resurgence, the organization said. Still, when cracks began to appear in the Treasury market, the Fed stepped in by buying notes. When small businesses showed increased risk of bankruptcy, the central bank formed new credit facilities. In the wake of credit-market chaos, the Fed said it would begin buying bonds. Read more: Bank of America breaks down how to build the perfect post-coronavirus portfolio — one designed to recover losses and get ahead of an eventual economic recovery The corners of the economy may not be directly linked to the equities market, but the message is clear: pain is being addressed. "The carnage being alleviated there, by virtue of what the Fed did, definitely had ripple effects into the equity market, no question about that," Liz Ann Sonders, chief investment strategist at Charles Schwab, said in an interview. The turning point for Goldman The Fed's latest stimulus effort — the aforementioned $2.3 trillion economic aid package geared towards small businesses and local governments — was a major turning point in Goldman Sachs' stock market outlook. In the days after the announcement, Goldman published a report saying the central bank's stimulus efforts have set a sturdy floor under risk assets, and declared that the stock market had already bottomed. The analysts in turn boosted their year-end S&P 500 forecast to 3,000 by year-end. "The Fed and Congress have precluded the prospect of a complete economic collapse," the team wrote. "The numerous and increasingly powerful policy actions have spurred equity investors to adopt a risk-on view." They continued: "The Fed and Congress have precluded the prospect of a complete economic collapse. Investors have been encouraged by the 'do whatever it takes' approach of the Fed." Read more: GOLDMAN SACHS: Stocks are expected to see unprecedented moves this earnings season. Here are 18 under-the-radar trades that could pay off big. While the central bank never directly aimed to boost the stock market, its actions have sent a clear signal to investors worried of rising default rates and closed-off credit lines, Seema Shah, chief strategist at Principal Global Investors, said in an interview. By consistently providing monetary aid, investors see the bank living up to its promise to act "forcefully" in keeping the economy afloat. "They have, in some ways, set up a backstop," Shah said. "For example, if you feel like there are significant strains building up in one important segment of the market, at this stage it's fair for a lot of market participants to expect the Fed to intervene in that part." After trillions in aid, what comes next? One drastic additional step for the Fed would be to directly prop up the stock market by buying stocks. But Rich Steinberg, chief market strategist at The Colony Group, thinks this is unlikely. He believes such a measure would throw too large a wrench into regular operations. "Investors are conditioned for markets to buy dips, and I think it would be problematic if the Fed directly supported the equity market," Steinberg said in an interview. "I think they're going to try to stick to their mandate as much as possible." So can other additional stimulus efforts from the Fed continue to boost stocks? Shah says that ultimately depends on whether the coronavirus threat subsides to a point where economic activity can resume as normal. In other words, no matter what the Fed does, the virus will dictate the terms of further equity gains. The Fed's policies "are able to help the market functioning," Shah said, noting that a return to normal corporate profitability relies primarily on how quickly the economy can recovery. Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come Profits — historically the biggest booster of share prices — depend on revenue recovering to pre-outbreak levels. Consumer activity will react on its own once lockdowns are lifted, "with or without the Fed help," Shah added. But don't count the Fed out completely. There's still time for the market to enjoy more Fed-induced optimism. The Fed has roughly $250 billion of available capital it can lever up as much as 10 times to either enhance existing stimulus programs or launch new ones, according to Bloomberg. Recent history also shows the central bank isn't afraid to write its own rules when the situation requires it, Sonders said. "Based on what they've already announced, they haven't exhausted all of the bullets," Sonders said. "Let alone the fact that, as we've learned, they can launch a whole new set of facilities if they need to." Now read more markets coverage from Markets Insider and Business Insider: The Fed isn't worried about enabling risk-takers as its massive stimulus attempts to revive markets and the economy, Cleveland chief says Goldman Sachs says now is the time to sell Apple, forecasts 20% drop from current level Goldman Sachs unpacks a ticking time bomb in the market's junkiest debt due to the coronavirus — and explains why even the Fed will be unable to avoid itJoin the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
The man behind the market's favorite recession indicator says his model still works, even as it says everything is fine in the middle of a global economic meltdown
The market's most famous recession signal no longer points to a recession, but Campbell Harvey, who...The market's most famous recession signal no longer points to a recession, but Campbell Harvey, who invented the model says this is because it is predicting a recovery after the recession The yield curve is no longer inverted with the 3-month US trading at 0.14%, below all of the longer-term US bonds US weekly job claims hit 5.2 million Thursday, taking the total unemployment claims in the last four weeks to over 22 million, and erasing more than a decade of jobs created. Visit Business Insider's homepage for more stories. Yield curve inversion is probably the market's best-known and favorite recession indicator, but amid a pandemic triggered global economic meltdown, the US treasury curve is looking decidedly normal. That shouldn't stop people trusting the efficacy of the indicator, which has successfully predicted the past eight recessions in the US, the Duke University professor who pioneered the model told Business Insider. A yield curve is a set of points which show how much yield investors get for bonds that expire at different points in time. Normally, the longer the duration of a bond, the more yield it provides, reflecting the risk of holding something for the longer term. However, during times of financial panic, the opposite happens, and longer-term debt becomes cheaper than short term debt. That reflects the fact that investors see things returning to normal in the longer-term, while in the short term markets will be choppy. Right now, the yield curve looks normal, even as a bitter recession looms large around the world. So has the model broken down? Campbell Harvey — the professor at the Duke University's Fuqua School of Business who created the model — defended his model and told Business Insider that even though the yield curve is currently upward sloping the inverted curve model still works. Why the model still matters According to Harvey, the yield curve is upward sloping because recessions are typically short in duration and a recovery follows. "The yield curve inverted in 2019 forecasting a recession in 2020. The yield curve is now upward sloping. It is not unusual for the yield curve to be upward sloping during a recession because it is forecasting a recovery." The signal flashed red in mid-August 2019 for the first time since the global financial crisis when two-year treasury notes became more expensive than bonds with a maturity of ten years. In February this year, the difference between the 3-month and the 10-year US treasury bond fell to its lowest point since October 2019. Asked whether the economy faces the prospects of a recession only because of the coronavirus pandemic, meaning the model may have made an inaccurate prediction otherwise, Harvey said: "We will never know if a recession would have happened without the pandemic, that is called a counterfactual." He added: "Obviously the model did not forecast a pandemic, nevertheless, the track record of the model is intact at eight from eight with no false signals." China's economy shrank by 6.8% in the first three quarters of 2020, signalling a bitter economic downturn for the country who was best shaped to survive the fallout. Meanwhile, the global economy is bracing for its worst recession since the Great Depression as the virus has brought every major economy to a standstill and outbreak continues to hamper economic activity, the International Monetary warned this week. An inverted yield curve has predicted every recession since the Second World War. The inverted yield curve has posted a false signal only twice before according to JPMorgan Asset Management. The first was in 1965 and the other in 1998. Coronavirus, which causes an infection called COVID-19- has caused at least 161,000 deaths and infected more than 2.3 million people. But not everyone is convinced the inverted yield curve should alarm investors and be interpreted as a definite indicator of a recession going forward. Christopher Schon, Qontigo, executive director of replied research at Qontigo said: "It would not be entirely fair to claim that the inverted yield curve we saw in August 2019 predicted this recession. The reality is, the coronavirus crisis has upended all previous predictions." Schon added that an issue with validating the inverted yield curve as an effective predictor of economic growth is that there is often a considerable time lag before the markers of a downturn emerge. "[We] found that share prices can continue to rise for another year after long-term yields fall below short-term interest rates. It can then take a further six months before the recession sets in," he said.Join the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America