US recession likely with ‘wishful thinking’ soft landing

Investing.com – Consensus expectations of a soft landing for the U.S. economy are a delusion, according to BCA Research, and the world’s largest economy will enter a recession later this year or in early 2025.

“We resisted the consensus narrative in 2022 that a US recession was imminent,” analysts at BCA Research said in a Sept. 27 note. “Then we predicted immaculate disinflation for 2023, which kept us tactically bullish on equities. But now we have joined the dark side and are calling for a recession to begin within the next six months.”

Stocks cheered the Fed’s decision to cut rates by 50 bps earlier this month, the investment research firm noted, a reaction that echoed January 2001 and September 2007, which also marked the start of the two largest easing cycles in this century.

In both cases, the Fed surprised investors by cutting rates by 50 bps. In 2001, it rose 5.0% on the day of the unexpected rate cut. In 2007, it increased by 2.9%.

Unfortunately, in both cases, stocks fell significantly in the following months. Back then, although it wasn’t obvious at the time, the Fed was behind the curve. This date is unlikely to be any different.

“We continue to expect the US to slip into a recession later this year or early 2025.”

The US unemployment rate has already risen enough to trigger the Sahm rule, while other recession indicators are also flashing red. In addition, revenue growth is likely to slow in the coming quarters, which should dampen spending growth.

“We were tactically bullish on the stock for most of 2023, moved to the benchmark earlier this year and then underweight at the end of June,” BCA Research said . “We expect the S&P 500 to fall to 3800 during the coming recession.”

“Accordingly, we recommend that investors underweight equities and overweight government bonds.”

It will drop to 3% in 2025, while the federal funds rate will reach 2%. The US dollar should weaken modestly over the next few months, but then strengthen during the next recession. The yen is our favorite currency for 2025.