Recession chances doubled, stocks may sink another 10%: Morgan Stanley
The probability of the US economy slipping into a recession is on the rise — and stocks still have much further to fall despite a months-long slump, the investment chief of Morgan Stanley Wealth Management said in a note to clients this week.
Morgan Stanley’s Lisa Shalett projected that the chances of an economic recession have doubled to more than 50% as the Federal Reserve aggressively hikes interest rates to combat inflation.
While the stock market has already fallen into a bear market, many companies have yet to fully account for the Fed’s sharp tightening effort in their earnings forecasts. Shalett argued that stocks could fall by another 5% to 10% before hitting bottom.
“We don’t think the cyclical bear market can end until earnings are marked down, which makes profit reports for the second and third quarters critical,” Shalett wrote in a Tuesday research note.
The Fed hiked interest rates by three-quarters of a percentage point earlier this month, the first time it has enacted an increase at that level since 1994. Fed Chair Jerome Powell has signaled that an additional hike of a half-percentage point or three-quarters hike is likely at the central bank’s next meeting in July.
The broad-based S&P 500 fell into a bear market earlier this month and is down nearly 21% so far this year. A bear market is defined as a 20% decline from a recent high.
While a recession is increasingly likely, the Morgan Stanley analyst said it is likely to be “shallow” in nature because elements of the economy remain strong. She pointed to strong fundamentals such as “resilient” housing prices, a tight labor market and solid household balance sheets.
“Historically, damage to corporate earnings tends to be more modest during inflation-driven recessions,” Shalett said in an accompanying blog post.
Fortune and Business Insider reported on Shalett’s note. Morgan Stanley did not immediately return a request for comment.
Morgan Stanley is one of several firms that have warned a recession could be imminent as the Fed moves forward with its plan. Citigroup recently placed the chances of a recession at 50%, while Goldman Sachs pegged the probability at 30%.
Meanwhile, Powell and Treasury Secretary Janet Yellen are among those who have insisted that an economic slowdown is not inevitable.
During a panel discussion Wednesday, Powell said the Fed must risk a recession to effectively address inflation that hit 8.6% in May.
“Is there a risk we would go too far? Certainly there’s a risk,” Powell said. “The bigger mistake to make — let’s put it that way — would be to fail to restore price stability.”