Why investors should remain on recession watch in 2023: Morning Brief

Feb 21st, 2023 5:29 EST

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Tuesday, February 21, 2023

Today's newsletter is by Brian Sozzi, Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Read this and more market news on the go with the Yahoo Finance App.

After some time on the shelf, I am pulling out my recession-watching binoculars once again.

Sure, you're going to tell me recent big reads on non-farm payrolls and retail sales are suggesting a recession in 2023 is not in the cards. Fair argument, and one Goldman Sachs economists agree with apparently.

The investment bank's economics team has slashed its twelve-month recession probability forecast to 25% from 35% — consensus expectations still put a 65% chance on a recession this year — reflecting "continued strength" in the labor market and "early signs" of improvement in various business surveys.


We also continue to witness positive market reactions to subpar earnings reports, which you don't see if economic growth is poised to fall off a cliff. Outlooks this week from Home Depot (HD) and Walmart (WMT) will put these reactions to the test again.

But investors appear to have forgotten one thing amidst all of these positive happenings.

Over the course of two weeks, the Fed reminded everyone who is boss.

Comments from Cleveland Fed president Loretta Mester? Hawkish. St. Louis Fed president Jim Bullard? Hawkish. Atlanta Fed president Raphael Bostic? Hawkish.

St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su

Now, we are hearing chirping on the Street the Fed needs to lift interest rates by 50 basis points at its March meeting to combat this stretch of strong (and inflationary) economic data.

Taken together, all of this raises my own recession probability from where it was a couple weeks ago.

Why? History says it should.

The Federal Reserve has embarked on an inflation-crushing rate hiking cycle nine times since 1961. Eight times a recession followed, according to a 2022 report from Piper Sandler. The only true soft economic landing came in 1994.

I plan to ask Doubleline founder Jeffrey Gundlach about these pressing economic and market questions when I sit down with him on Wednesday for an in-depth chat on Yahoo Finance Live.

Gundlach was among the first people to warn of a growth slowdown in early 2022 when he chatted with me from inside his California home. He also warned about bitcoin.

Both calls were spot on, and I suspect he has more wisdom to share this week.

Happy Trading!

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