The question that remains under analysis is the duration and intensity of the recession. The stock market crash has wiped out nearly $35 trillion of global wealth in the first half of 2022.
Taken from Forbes Central America
The specter of recession is growing ever larger. That's the reality. Leading experts are urging caution, and there's a growing consensus that the main risk for 2023 is a crisis fueled by high inflation and rising interest rates in developed markets.
The question that remains under analysis is the duration and intensity of the recession. The stock market crash has wiped out nearly $35 trillion of global wealth in the first half of 2022.
From a chronological perspective, the European economy is headed for a recession by the end of the year, while the US economy could enter one as early as the first quarter of 2023. A mild recession is expected in the United States, while in Europe, its severity will depend on how the energy crisis is managed. Is there anything investors can do?
To begin with, the US economy, the benchmark for Western economies like Spain's, is showing signs of slowing growth and peaking inflation. Although Gross Domestic Product (GDP) has fallen for two consecutive quarters, Gross National Income (GNI) increased during the first quarter, and real personal income, excluding transfers, rose in the second quarter.
“This increases the likelihood of an increase in the IIB in the second quarter,” note Aneeka Gupta and Pierre Debru, analysts at WisdomTree. “Furthermore, history has shown that the gap between GDP and GNI tends to close, with GDP moving closer to GNI,” they add.
The labor market remains strong, with continued job creation, rising wages, and unemployment at its lowest level in five decades. The decline in the Consumer Price Index (CPI) from 9.1% to 8.5% provided some relief to the markets.
The Federal Reserve's roadmap has been significantly adjusted since the release of the CPI results, with the terminal interest rate falling from 4.55% to 3.55%. Although inflation eased across both core and non-core components, cyclical components remain elevated. This CPI data validates the case for a 50 basis point (bp) rate hike in September and further moderation going forward (less than 75 bp of rate hikes from now on).
ENERGY AND RECESSION IN EUROPE
The European economy continues to struggle due to the ongoing energy crisis. The risks of higher inflation have intensified. The eurozone economy narrowly avoided a technical recession in the second quarter, as GDP grew by 0.7% quarter-on-quarter. However, the growth outlook remains bleak amid the energy crisis.
Russia has weaponized its energy and food supplies, given Europe's heavy reliance on them. The eurozone is facing an energy shock and significantly higher inflation than the United States. With energy prices rising 42% year-on-year in June 2022, the energy sector accounted for more than half of the 8.9% year-on-year inflation recorded in July.
What further complicates matters is that the Rhine River, a mainstay of the economies of Germany, the Netherlands, and Switzerland for centuries, will become virtually impassable at a key point along the route due to extremely low water levels. “This situation could disrupt the transport of energy products and other industrial goods along one of Europe’s most important waterways,” say experts at WisdomTree.
THE INVESTMENT APPROACH
Markets like to be one step ahead. They don't so much react to news as they anticipate it. "Buy the rumor, sell the news" is a famous phrase for a reason. In most cases, markets begin to fall at the risk of an economic recession, not when a recession is virtually guaranteed. This year is no exception.
The first quarter's performance was very tough for investors because markets anticipated that sharp interest rate hikes would slow the economy, even if it continued to grow. Once the economy began to show signs of slowing, markets started to anticipate monetary easing and rebounded in July.
What does this mean for investors? It means that, in all likelihood, the time for a very defensive positioning has passed. The recession is priced in, and therefore, focusing on cash and minimal volatility would have been a good idea months ago. It may be too early for an aggressive, cyclical strategy. Markets haven't yet priced in whether it will be a deep or prolonged recession. "It could still be months before a strong and consolidated rebound," say Gupta and Debru.
This leaves investors with defensive options for all types of weather. Equity investments can protect the portfolio if the market expects a deeper recession or participate in the rallies if it anticipates a more technical downturn.
It's not surprising that the most defensive factor is minimal volatility, which reduced its losses across all eight periods. It's clear that minimal volatility has a very low upside/downside ratio. "This contrasts with the quality and high dividends, which, despite its defensive nature," these experts analyze.
“Looking ahead to the second half of 2022, which is fraught with uncertainty, a balanced approach between high-quality stocks and dividend-paying stocks could prove very useful in navigating through the various ups and downs that may materialize,” conclude the experts at WisdomTree.
*This text was published in Forbes Spain
