Last week, Goldman Sachs lowered its U.S. recession expectations to 15%.
It was a big drop from the 35% projected earlier this year. The bank estimates that the U.S. economy is in decent shape. Or at least better than other nations, some of which have already recorded two quarters of negative economic growth. Which is a technical definition of recession.
The investment bank tracked recent economic indicators, such as a strong labor force and steadily declining inflation. The Federal Reserve did a good job taming inflation from 9.1% last June to 3.2% this July.
But while the U.S. is doing well, the rest of the world isn’t in such good shape.
The global economy is facing a headwind from low growth rates in China. Even after recovering from the pandemic, China has trouble getting back on track. After all, it’s still a major consumer of many industrial and consumer goods, from commodities to luxury cars. Its economic health is vital for the rest of the world.
Europe is also lagging. The ongoing war in Ukraine is a massive distraction for the union’s economy. The energy crisis is still a heavy burden for the region.
On top of this, the Organization of the Petroleum Exporting Countries (OPEC) and Russia extended their production cuts. This immediately pushed the oil price to $90 per barrel.
It’s a significant inflation threat. Oil prices drive fuel prices, which are vital to most industries. A surge in the oil price may lead to rising prices of other goods and services. That’s why the markets are not expecting central banks to cut rates anytime soon.
Inflation can get out of control quickly. Policymakers know it and will likely keep rates higher for a while. Just this week, the Bank of Canada left its interest rates unchanged. The Fed is expected to keep its benchmark rate steady next week as well.
Yields Rise as U.S. Growth Expectations Improve
This is why the 10-year Treasury yield rose to the highest levels in years. And so did the U.S. dollar against a basket of currencies. Investors still see the U.S. economy as a safe haven. They are ready to invest in the country because they have few other options.
However, they also realize that interest rates may stay higher for longer. This is not really promising for the broad equity markets. As a result, stocks declined following the news.
How long would it last?
Goldman Sachs now estimates that the Fed will cut interest rates in the second quarter of 2024.
This will be bullish for stocks. And that’s why we wouldn’t expect a massive stock selloff right now. The market is forward-looking. It’s pricing in the upcoming policy changes already.
Who will win the most when the Fed cuts?
Essential industries with government support are at the top of our list. Green energy transition and artificial intelligence continue to attract investors’ attention and capital. That’s where we see the most upside.
This industry has strong growth potential and is one of our main focuses.
Thank you for your loyal readership,
The Financial Star team