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Davos Elite Can’t Agree About the Economy and Neither Can Markets

Usually, people in Davos will focus on markets and the economy at the World Economic Forum in Switzerland. The “Davos consensus” can be a useful counter-indicator as it is often completely false. But there is no consensus this year, which helps explain the market mayhem.

The S&P 500 is almost in a bear market. However, there is no agreement on whether the recession will continue. The problem, as many executives describe it: The business is great right now, but the difficulties ahead are clear.

“Here [in Davos] everyone is pessimistic,” said Standard Chartered President José Viñals. “But when I asked them how their business was, the picture was fantastic. May be business reality catches up with [very negative] macroeconomic reality. ”

This division helps to explain why the corporate and banking leaders of the mountain elite gather to have such different views. Those who focus on strong consumer spending data – including Bank of America Chief Brian Moynihan – trumpet the idea of ​​a recession. Those looking at the storm clouds in the distance were genuinely concerned.

George Oliver, President and CEO of heating and air conditioning manufacturer Johnson Controls, exemplifies today’s strong business. “We did a great job,” he said. “We see strong demand… we’re obviously watching that closely.”

On the other side are a bunch of war-focused financiers and executives, energy crisis, food crisis, geopolitical reconstruction and retreat from globalization.

Douglas Sieg, managing partner at fund manager Lord, Abbett & Co., said: “It’s amazing how six months ago the world didn’t feel this complicated and suddenly, the last three months didn’t. nothing but big problems”.

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For now, Wall Street is more focused on the current good earnings than on threats. Forecasts for this year and next year’s S&P 500 earnings are both up this year, despite any talk of a recession. Analysts are still upgrading forecasts more than cutting them.

Yes, valuations are falling – a lot – but this is not primarily due to higher recession risk. Instead, it reflects expectations of much higher interest rates. The valuation multiples of expensive stocks that are well-placed to withstand an economic downturn will fall more than those of companies that – often cheaper initially – benefit from a growing economy. .

The market seems to be saying that the Fed’s plans combined with supply chain easing and energy issues will bring inflation back near the 2% target in a few years, without Chairman Jerome. Powell echoes the extreme rates that cause recessions. rose by his predecessor Paul Volcker in 1980. But consensus was not strong and major investors disagreed on both sides.

The recent stock market performance has got everyone talking about a possible recession in the US. So what are the top economic indicators that are solid recession trackers, and what can you do to prepare for one? WSJ’s Dion Rabouin explains. Illustrated by: David Fang

Scott Minerd, chief investment officer at Guggenheim Partners, thinks what the Fed is planning is too much and will hurt growth.

“The Fed is being too aggressive but has no political will to step aside,” he said. Stop printing money and “inflation will go away on its own”.

If true, the Fed will stop tightening monetary policy sooner than expected when inflation recedes and bonds will be an attractive investment. But the opposite bet is endorsed by hedge fund giant Bridgewater.

“It is very likely that inflation becomes self-reinforcing,” said Bob Prince, co-chief investment officer. “The odds are in their favor that they [the Fed] not doing enough and doing too little, too late, that is the pattern so far. “

To some extent, the divergence manifests as profound uncertainty in the market, which affects the stock. Vix Index of Implied Volatility on the S&P 500 has been above 25 for 5 weeks, something they haven’t done since 2020 and the uncertainty of the pandemic, and before that was 2011, when the Fed introduced its unusual Operation Twist easing policy. But Vix is ​​still far below the true level of panic.

The ideal outcome would be that the recession could be delayed, or at least mild, as robust consumer spending was sustained by full employment and banks’ willingness to lend, even as capacity pressures continue to rise. volume and supply chains eased and the Fed’s action eased some of the heat.

But in my opinion, it’s an increasingly better line to go. If it goes wrong, there’s plenty of room to estimate earnings plummeting and stocks plummeting.

Write to James Mackintosh at james.mackintosh@wsj.com

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Edmund DeMarche

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