News analysis
In the first half of 2022, we saw a historic proportion of financial market slaughter, from equities to bonds to cryptocurrencies. Analysts say the rout is part of the market process of assessing how serious the next recession will be, with the view that central banks are no longer behind the market.
“There was this kind of implicit asset guarantee, and it became much stronger during COVID, … [that] If the market collapses, the central bank will intervene. That belief is now (naturally) declining, but in any case it is now declining. ” Peter St. OnjiA researcher in the field of economic policy at the Heritage Foundation, based in Washington, DC, told The Epoch Times.
A former senior fellow at the Montreal Institute for Economic Research believes that the potential recession is most similar to what happened in the early 1970s due to rising inflation. However, he said he believes that the amount of debt in the financial system can make the final drawdown much more painful.
“We have never been involved in this unique set of bad policy mistakes, right? We’re ruining the economy and sending out a lot of money. [leads] It will subsidize debt to the extent that it will be driven by inflation and weaken the entire financial system, “he added, adding that no one knows how much asset prices will fall under these circumstances.
He added that if stock prices fall sharply, central banks must start lowering interest rates again, no matter what the level.
The US’s largest equity broad gauge, the S & P 500, closed in the bear market territory in early 2022, dropping more than 20% from its most recent highs.This represents the loss of the United States$ 8.5 trillion And the worst first half decline since 1970.
Bonds usually recover when stock prices plummet, while US Treasuries fell 11% in the first half of 2022. Deutsche Bank said the US 10-year Treasury Index recorded the worst first half since 1788.
However, bonds have recovered significantly since early June, which usually indicates a deterioration in the economy, including increased likelihood of a recession.
David Rosenberg, Founder and President of Rosenberg Research, interviewed on July 4th. BNN Bloomberg Compare the current plight with the “mirror image” of the emergence from the first lockdown in early 2020, when the central bank cut interest rates to zero and funded large amounts of government spending, which stimulated the market well. Did. The economy recovered rapidly from the sharp recession caused by the blockade, and the market soared.
But now, central banks are fighting runaway inflation by rapidly raising interest rates while removing stimulus from the financial system. Therefore, the market is in free fall.
“It’s just called logic, in a nutshell,” Rosenberg said.
He explained that the decline of more than 20% in US stocks in the first half of 2022 is just the beginning, reflecting the abolition of overly high valuations due to very low interest rates.
“We haven’t seen a recession hitting earnings or analysts’ earnings forecasts yet,” he said.
Craig Basinger, chief market strategist at Purpose Investments, said on July 4 that the factors pushing up equities and bonds have reversed, resulting in a “significant price change in assets.” Note To the client.
“The magnitude of the decline in wealth cannot be exaggerated,” he said.
Notably, Bitcoin does not provide effective protection against rising inflation and does not offset the decline in equities and bonds as assets aimed at providing portfolio diversification. Hmm. Instead, cryptocurrencies had the worst month on record in June, when it fell 40 percent. Bitcoin fell 58% in the first half of 2022.
Deterioration of Canada’s recession
Canadian stocks energyIn the first half of 2022, the Toronto Stock Exchange Index fell by only 11.1%, rising by 23.6%. However, analysts expect a more serious recession in Canada than in the United States, primarily due to the housing market.
“”The Canadian economy is far more sensitive to interest rates than the United States, given the bubbling housing market and high household debt. Due to high debt levels, the next recession in Canada can be more serious than the recession in the United States, “said Basinger.
When Canada falls into recession, most of the weaknesses in the economy are due to housing, says David Doyle, head of economics at Macquarie Group.
He said BNN Bloomberg On July 4, housing investment in GDP was about 10% in Canada, but less than 5% in the United States.
“Given the fact that there is a much more serious structural imbalance here and housing can drive many of Canada’s economic weaknesses, as in past recessions. In terms of GDP drawdowns. We believe the effects of the recession will be much more serious. [gross domestic product] We are growing in terms of how high the unemployment rate will be, “Doyle said.
Canada’s economy is already showing signs of slowing down. economic growth 0.8% in the first quarter of 2022 was lower than in the last two quarters of 2021.
NomuraThe basic case is the global recession in the next 12 months. Japanese investment banks are also predicting a serious recession in debt-fueled housing boom economies like Canada.
“At this point, the market is almost always leading ground activity for 6-12 months, so equity weaknesses have strengthened expectations of much more severe economic growth conditions throughout the year,” said BMO’s senior economist. I will. “ Robert Kavic June 30th.
According to Rosenberg, the S & P 500 usually peaks six months before the recession and the stock market bottoms out two-thirds to three-quarters of the recession. Given that he rates the recession as just beginning, he said the fourth quarter of 2022 will offer great opportunities to buy stock.
“If you are a stock investor, patience and discipline are the order of the day,” Rosenberg said.
As a guide to the recession, St. Onge suggests that companies reduce inventories and pay attention to hiring, saying that if investors are there for a long time, there is less to worry about.
“your [investors’] The horizon is 5 or 10 years, leave it alone, don’t even worry about it. Keep the dollar cost averaging method. “
follow
Rahul Vaidyanath is a journalist in The Epoch Times of Ottawa. His areas of expertise include economics, financial markets, China, and defense and security. He has worked at the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York and Los Angeles.