Stock Market in the Face of Uncertain Soft-Landing and Oil Price Shock: What to Expect?
The rise in oil prices has made markets that were not worried about a soft landing more cautious. A recent survey conducted by Bloomberg found that most economists on Wall Street expect an economic downturn to occur within the next 12 months, with a likelihood of recession of approximately 60%.
Here are the reasons why economists found an economic soft landing dubious:
Slumping savings
The economy has been propelled by a consumer spending boom this year, but it may be losing momentum. Economists at the San Francisco Fed predict that the excess savings amassed by Americans during the pandemic, which reached over $2 trillion at its height, could be depleted this quarter, potentially harming growth.
Stricter bank lending
According to the Federal Reserve's recent quarterly survey of bank loan officers, there has been a widespread rise in loan application difficulty, resulting in a reduction of capital flow to businesses.
Excluding the initial period of the COVID outbreak, the standards for business lending are presently at their most stringent level since the 2008 financial crisis.
Stringent [commercial and industrial] loan standards are consistent with near-zero [year-over-year] growth in real GDP over the near term," wrote BNP Paribas economists in a recent note.
Oil prices are creeping up
While the decrease in inflation over the past year was attributed significantly to the plunge in energy costs, the current surge in crude oil prices, which have almost reached $90 per barrel, could pose another challenge for both the economy and long-standing endeavors to suppress inflation.
The surge in energy expenses was a contributing factor to the U.S. experiencing a recession during the mid-1970s, as well as in the early 1980s and 1990s. The spike in costs resulted in heightened inflation and reduced consumers' purchasing power.
Inflation may decrease at a slower rate without the benefit of declining energy prices. As a result, it is possible that interest rates will remain elevated for an extended period, which could potentially lead to an economic downturn.
Erin Browne, the portfolio manager for multi-asset strategies at Pacific Investment Management Company, warned that equity investors are neglecting to account for the possibility of a recession. The manager also noted that factors such as increased oil prices could potentially prompt a drop of around 15% in the S&P 500 Index.
Oil is one of the biggest challenges for the Fed," Browne said. While the policymakers are focused on core inflation — which excludes volatile inputs like food and energy — higher oil prices will move durable goods prices higher and hurt the economy, making it "difficult for the Fed to meet the market expectations of three rate cuts next year."
Source: Axios, Bloomberg
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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