Stocktake: Recession prospects key to market outlook

Key question is whether a US recession is on the horizon

The S&P 500 enjoyed a double-digit percentage rally after bottoming in early March only to tumble lower in recent weeks. Is further bloodshed in store, or will March’s low prove a durable bottom?

Stocktake recently noted that, technically, very strong bounces usually augur well for indices, indicating the recent rebound is not a mere bear market rally.

As for fundamentals, the key question is whether a US recession is on the horizon, says JPMorgan's Michael Cembalest. In his Eye on the Market report last month, Cembalest argued March's lows would likely hold as long as there is no recession.

Stocks had fallen almost 15 per cent, similar in magnitude to other large selloffs in non-recessionary periods. Further downside is only likely if there is a recession, he added.


Cembalest reiterates that stance in his latest report. Yes, some recession indicators are rising – the inversion in bond yields, consumer sentiment collapsing to one of the lowest levels in 70 years, declining small business sentiment, rising inflation, increased Russia-related economic uncertainty.

That said, a 2022 recession remains unlikely, with Cembalest pointing to tight labour markets and healthy household and corporate balance sheets.

Recession risks look higher for 2023-24, says Cembalest, but indices are unlikely to breach March’s market lows.