The Wall Street Journal reported that “the financial markets saw” terrible “losses in the first half of 2022, noting that” it could get worse. “
In a report, the Wall Street Journal explained that “the first six months of 2022 were full of surprises, such as inflation and the biggest bond sales in four decades, the decline in technology stocks and the internal collapse of cryptocurrencies.” and notes that “the danger looming The horizon that investors have ignored for months is a recession, but whether the economy will collapse or prosper remains to be seen.”
Attempts to place the probability on it range from 90% in a Deutsche Bank customer survey of the 4.11% false accuracy of the New York Federal Reserve’s recession forecast model.
The report indicated that, “while investors may eventually focus on a state of” uncertainty “over a recession, risks elsewhere in the world could also hurt U.S. investors,” noting that “Japan will eventually have to withdraw and allow securities- “yields will rise, which will lead to an increase in bond yields. It will absorb the cash that the country’s investors have pumped abroad.”
“In Europe, the central bank has promised a new plan to support Italy – but we have seen this offer before, if it follows the pattern of too little and too late, we can see the return of the eurozone debt crisis, which is something the markets are not preparing for, ”he said.
The Wall Street Journal added that “almost any economic outcome is likely to be a new surprise, and that if there is a weak decline, equities will fare well with the panic reversal of the last recession, and if there is a recession can easily be a big loss. ” Looking ahead, only the decline in recent weeks appears to be linked to recession risks.
The report pointed out that there is a small piece of good news, namely that “prices have already fallen a lot, which brings them closer to wherever they will end up,” and noted that “the S&P 500” has fallen the most in the first half of the year since the 21% loss in 1970, when the economy was in a recession, and long-term treasuries lost 10%, even including coupon payments, the biggest loss in six months since Paul Volcker’s Fed the economy in a recession in 1980. “.
“There is no sure way to know what probability the market is placing on the Federal Reserve to push the economy into a recession this time,” the newspaper reported.
“The simplest way to extract the probabilities from price movements is to compare price declines with the average peak-to-bottom decline in previous recessions,” quoted Wall Street Journal’s Nikolaos Panigertzoglou, a strategic analyst at JP Morgan. 500 “decreased by a little over 20%, and the average decrease in the last 11 recessions was 26%, indicating that the probability of an economic recession is about 80%.”
However, many of the sales this year were not about recession risk, and to find out, we need to distinguish between the direct and indirect effects of the Federal Reserve on stock and bond prices. I mean those with high valuations like “Big Tech”, and that was what dominated until June, with bond yields rising and growth stocks collapsing, while cheap “value” stocks were basically good, and if we exclude the technology sector to exclude most of this The effect. The performance of the economically sensitive cyclical sectors of the stock market was slightly less than the performance of their defense by the seventh of June, when everything changed, and investors woke up to the indirect effect of the Federal Reserve, which is to weakened, and this has an almost opposite effect on asset prices, This means that a weaker economy has less inflation than others, which justifies lower bond yields, and it also affects earnings, especially for cyclical companies, which tend to share to hurt relatively low valuations. More than growing stocks, according to the Wall Street Journal.
Since June 7, cheap stocks have been hit hard and cyclical sectors have fallen, especially oil stocks and miners, as recession fears have also surfaced in Treasurys over the past two weeks as investors bet the Fed will have to cut interest rates aggressively this year. drop of almost half a percentage point in the treasury for 10 years is the largest in this period since the first closure due to the Corona virus, according to the newspaper.
The newspaper pointed out that “markets are now aware that the outlook is bleak,” explaining that “there are clear risks that could be imported from abroad,” while “hedge funds are betting heavily on the Bank of Japan,” as it will abandon. its securities yield controls, which have protected them from global monetary tightening and the crushing of the yen, and if hedge funds are right – and the BoJ is not forced to act – Japanese bond yields will rise and the yen ‘s serious weakness will change in counterproductive and volatile markets worldwide. “
Better yields at home, plus the potential for currency losses, will encourage Japan’s army of small investors to bring their money home, which will send the yen higher and lower prices elsewhere – contributing to the more upward pressure on Treasury yields “- and note that” the risk of Europe is known, and it is political. “
The report added: “The European Central Bank acted early to avoid the Italian government’s financial crisis, and now it has the difficult task of persuading the frugal North to accept an agreement guaranteeing government bonds, without imposing unacceptable conditions. “Imposing Italy, and if it fails to raise sufficient funds, it could face Italy and the eurozone is again a serious problem by the autumn.”
He said that “economic data on the recession are going in the wrong direction, and high interest rates have not yet started to affect ordinary families,” stressing that “the risks are great, and the markets are still not fully prepared.” The Wall Street Journal.