What is stagnation? And what that might mean for stocks, oil and gold. :: InvestMacro


Things look bleak in the world.

The prices of goods and services are skyrocketing at a pace not seen in several decades, making it more expensive to carry on with our daily lives.

At the same time, more than 60 central banks around the world have already raised their interest rates, and are set to continue to do so for the rest of this year…and beyond.

This combination of severe inflation + global policy tightening could eventually lead to a significant drop in demand/consumption, higher unemployment, slower economic growth, or worse, a recession.

What is stagnation?

You’ve probably heard about this word being used a lot lately.

We definitely use it a lot on our site daily articles.

A common way to assert “recession” = when the economy has contracted for two consecutive quarters.
So beware of negative GDP numbers.

However, given that the GDP numbers are lagging, this definition means that we will only know that a recession has arrived after, after It has happened.

Even the NBER (National Bureau of Economic Research), which is seen as the number one authority in identifying a “recession” while using a wider range of data, says it can take anywhere from 4 to 21 months before determining that a recession has begun.

Also, it is difficult to predict when a recession will occur, although that has not stopped the forecasts that have already been made.

  • Both Tesla CEO Elon Musk and former New York Fed Chairman Bill Dudley say a recession in the US is “inevitable”.
  • Goldman Sachs puts a 30% chance of a recession sometime in 2023, while Deutsche Bank analysts Christian Swing and Citigroup analysts believe the probability is 50% higher.
  • Even Fed Chairman Jerome Powell admitted yesterday that a US recession is a “possible possibility”.

Recession fears are already beginning to appear in global financial markets:

  1. There have been bouts of yield curve inversion – a common sign of a looming recession.

    An inversion of the yield curve means that investors are more willing to put their money in the safe hands of the US government for a longer period (say 10 years), for fear of short-term economic disruptions (say, two years).

    Markets expects to see further inversions in the yield curve in the coming months.

  2. Risky assets, ranging from stocks to cryptocurrencies, have been hit! At a time of heightened economic uncertainty, investors are less willing to make risky bets.

    The S&P 500, an index used to measure the overall performance of US stocks, has lost more than 20% so far this year, consistent with the definition of “alcohol market“.

    The S&P 500 could drop further, likely to test the 3000 lows for support.

  3. Even oil has been pulling back some of its impressive gains lately. Investors and traders fear that a recession could mean less consumption/demand for the commodity, and thus lower prices.

    While the fundamental forces (supply and demand) should indicate that oil can remain elevated, Prices could still drop below $100 as traders and investors continue to assess the possibility of a recession.

What assets can outperform?

safe havens They are assets that promise to protect one’s wealth in times of great fear.

Time and time again, gold has proven its value as a safe haven.

However, before a recession hits, the Fed wants to send interest rates much higher and suck more money out of the economy to help bring down inflation.

Hence, gold could continue to slide in these levels below $1,900 under the weight of these upcoming Fed rate hikes for the rest of 2022, before potentially pulling back as the prospects of a recession loom.



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