According to the chief executive of financial consultancy Longview Economics, the latest US economic data points to an imminent recession and investors may need to brace for some stock market pain.
Speaking to CNBC’s Squawk Box Europe on Friday, Chris Watling said he believes a recession is brewing, citing what he described as “fairly compelling” and “brutally bad” leading economic indicators.
The Conference Board said on Thursday that its leading economic index for the US fell 1.2% in March, the lowest since November 2020. The data seemed to indicate that the economic weakness could soon intensify and spread across the US economy.
Alongside this red flag, Watling said the typical period for a recession after the government bond yield curve inverted, first in March 2022 and then again in subsequent months, is about a year.
“Anytime you’ve had that in the US, you’ve had a recession. So I think she’s coming, she’s on her way. It’s just a timing issue,” Watling said.
While many economists have warned of a looming recession, just last week the International Monetary Fund indicated it had been surprised by recent strength in US jobs and consumer spending.
The IMF released its latest World Economic Outlook report on April 11, in which it said the world’s largest economy will grow 1.6% this year, up from a 1% forecast in 2022.
Gita Gopinath, the IMF’s first deputy secretary, told CNBC’s Joumanna Bercetche last week that signs of cooling in inflation data have given the fund reason to believe the US economy could avoid a recession. A so-called hard landing is still “in the realm of possibility,” she added.
Earnings expectations “much too optimistic”
Asked Friday whether stock markets could weather an expected economic downturn relatively unscathed, Watling replied: “I mean, we don’t think they will come through unscathed. I’m not even sure if it’s relative.”
“The reality is if you look at profit margins, they hit record highs in 2021 and a little bit into 2022, and obviously when you have a lot of inflation you can get very good operational leverage so you can get record high profit margins,” Watling said .
“If you get into a recession, we need to double hit margins. You have to normalize them back to normal levels, and then you have to price in a recession. So, I think the expectations for earnings are way too optimistic and therefore the stock market will have to deal with that at some point.”
— CNBC’s Karen Gilchrist contributed to this report.