Faced with the possibility of a recession in 2023, stock markets oscillate between concern and anticipation. This analysis looks at the implications of this situation, first defining what a recession is, then identifying the key indicators to monitor, and finally considering the possible scenarios.
What is a recession?
A recession is a period of contraction of economic activityusually defined by two consecutive quarters of negative growth of real GDP.
In 1929, 1973 and 2008, the recessions were characterized by a unemployment increasea drop in consumption and of theinvestment.
From 1973they have particularly marked the financial markets (and the trading world) by a strong downside volatility.
What are the factors that lead to a recession?
A multitude of factors can contribute to a recession.
Among these are:
- Of the external shocks (war, crisis, raw material degradation)
- A restrictive monetary policy (rate increase)
- Of the financial bubbles (Subprime)
- Of the debt crises (default of payment)
Currently, three of these factors are occurring (monetary policy conducted by the FED since 2022, the covid effects and a debt crisis).
All this at the moment complemented by a rise of the unemployment curve which would reinforce the announcement of a recession by the FED in June 2023 FOMC.
Indicators to watch
In prediction of a recessioninvestors are watching closely several economic indicators. THE institutional they also watch the big ones graphic movementsoften sign of anticipation of an announcement by insiders.
Economic indicators
These include:
- Unemployment rate and its increase
- Inflation
- GDP
- THE confidence indexes
- Indicators of industrial production (correlated to unemployment)
The graphic configurations
In the stock market, certain graphic configurations may indicate an impending recession.
Of the significant sales movements which follow a substantial pump (see cac index), capturing the liquidity of shorts and taking profits in advance.
A inversion of the yield curve (when short-term interest rates exceed long-term rates) has historically been a harbinger of recession.
On a temporary ladder, the announcement of a recession is usually made 6 months after the rate crossing. However, in June 2023, it will be 6 months since the rates have crossed.
As a reminder : the FOMC is due to take place on June 13, an announcement could take place then, rocking the markets.
Possible market scenarios when a recession is announced
In this part, we briefly present two possible scenarios.
bearish scenario
In the bearish scenariothe recession leads to a significant drop stock markets.
Institutions sell in large quantities. Investors, anticipating a decrease in the profitability of companies, sell their shares, which leads to a even greater drop in prices.
This decrease can be exacerbated by panic and market volatility. Institutions that have already created liquidity cascades beforehand.
A recession already priced?
It is also possible that the recession is already “priced” in stock markets.
This means that investors have already priced in the anticipated impact of the recession on corporate profits, and stock prices have already been adjusted Consequently.
In this case, the recession may not lead to a significant further decline in the markets.
This scenario, although less likely due to graphic movements, remains nevertheless possible.
Our opinion on the possible scenarios of a recession
If there is one area where anything can happen, it is the stock market.
However, although fundamental and chart analysis are not exact sciences, the real economy makes it possible to reinforce certain assumptions.
Since the covid effects are still present (explosion of the money supply), the crossing of rates being real and the increase in unemployment concrete, we believe a market correction more likely in the coming weeks.
We urge you not to take risks during a period of high volatility and to monitor key levels of your assets.
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