ContrarianEdge: Why Non-Transitory Recession Is Coming and How to Face it as an Investor
Many market participants are looking at the current data showing slowing inflation with a sigh of relief. It appears the economy will avoid a so-called hard-landing. In other words, a deep recession is likely off the table.
However, that overlooks the fact that we’ve been in a recession. The first two quarters of the year showed negative GDP growth in the US. Historically, that’s been the definition of a recession.
And while inflation is starting to decline, the latest read of 7.7 percent is still the highest in decades. Inflationary pressure is still on thanks to supply chain issues and fiscal policy.
The good news? A recession can act like a forest fire. It can weed out bad companies and clear out the underbrush. However, like fire management policy, trying to avoid recessions causes a buildup that can make the next one worse.
Given the amount of proverbial dead wood accumulated since 2008, it’s possible that the next recession won’t be transitory. It could be deeper and longer-lasting than most participants expect.
With stocks still looking bullish, and with valuations still historically above average, a steeper market drop could be ahead.
Meanwhile, while a recession will take inflationary pressures off the table, paying for higher government debt could mean higher taxes. That would also, in turn, reduce consumer demand and delay an economic recovery. The end result? An increase in the likelihood of a non-transitory recession.