- John Mauldin believes a recession is probably coming this year.
- He said he believes the Fed will tighten policy harshly to curb inflation, causing a downturn.
- He also said stocks could suffer a drop in the 40% range.
John Mauldin thinks things are going to get rocky.
As the Federal Reserve begins to tighten policy aggressively to cool down the highest inflation since 1981, the famed economist doesn’t have faith that the
will be able to dial their policy in a way that doesn’t cause a
“Powell and his crew hope to engineer the fabled ‘soft landing,'” Mauldin said in a recent commentary. “I really doubt they can do it.”
Recession talk has been heating up following the rise of the 2-year Treasury yield above the 10-year in March. So-called yield curve inversions have preceded every recession since the 1950s.
Some have downplayed the indicator, saying that many fundamental economic indicators are still strong, and that Treasury yields are currently manipulated by monetary stimulus measures.
But to Mauldin, who called the 2000 and 2008 downturns and has been working in markets since 1982, there are plenty of signs that show this time is no different than the past several decades.
“We have many indications recession is near,” Mauldin said.
One of them is that the housing market is starting to see a slowdown in activity, according to Bleakley Advisory Group CIO Peter Boockvar. Experts like Ian Shepherdson, the found of Pantheon Macroeconomics, and Solita Marcelli and Jonathan Woloshin, strategists at UBS, have said in recent weeks that they see a decrease in activity and the pace of price appreciation as mortgage rates rise and inflation cuts into budgets.
Second, manufacturing is seeing a deceleration, with new orders down. Morgan Stanley’s Chief US Equity Strategist Mike Wilson cited earlier this month poor PMI data as a reason he’s bearish on stocks in the months ahead. He said he believes the S&P 500 could fall as much as 13% before September. Wilson hasn’t explicitly made a recession call, however.
Correspondingly, the transportation industry is also signaling a slowdown, Mauldin said, citing the view of FreightWaves CEO Craig Fuller.
Given the political pressure surrounding inflation, Mauldin told Insider on Friday that the Fed could institute 50-basis-point rate hikes beyond the next two meetings, and that they would continue hiking until inflation begins to drop.
He said that he believes a recession will likely happen in the third or fourth quarter this year.
As far as what a recession would mean for stocks, Mauldin said he wouldn’t be surprised to see the S&P 500 fall somewhere in the 40% range, as the average
corresponding with recessionary periods is around 43%. He said, however, that it’s difficult to predict how much the market would fall given the high weighting of the biggest stocks in the index.
Mauldin’s views in context
Mauldin’s call for a recession in the back half of 2022 is much earlier than consensus on Wall Street right now.
Deutsche Bank economists Matthew Luzzetti, David Folkerts-Landau, and Peter Hooper in early April became the first on Wall Street to make a specific recession call, saying they think it would come toward the end of 2023. They said a 20% bear market would likely precede it.
Credit Suisse’s Jonathan Golub also told Insider this week that he believes a recession will occur in early 2024, give or take six months before or after. The economy and stocks are likely fine for the better part of 2022, however, Golub said.
“If you look at the short end of the yield curve, the 3-month to 10-year yield curve, it’s over 2%. Those are numbers that are just totally inconsistent with a recession,” Golub said.
He also cited strong consumer spending and savings, and a consensus economist GDP prediction of 3.3% for 2022. Golub’s 2022 S&P 500 price target is 5,200, one of the most bullish among Wall Street strategists.
Goldman Sachs puts the chances of a recession in general at 38%, and has recently become more bearish on stocks and economic growth in the months ahead. But the bank’s Chief US Equity Strategist David Kostin has a 4,700 price target on the S&P 500 for 2022. It currently sits at 4,392.
Former Fed advisor Danielle DiMartino-Booth told Insider in March that the Fed would hike rates “until something breaks.”
The economy looks relatively strong by the standards of employment — only 3.6% of Americans are unemployed, and the US economy has had two strong jobs reports in a row .
But with inflation at its highest level in 41 years, the Fed is likely to tighten policy in a significant way. In such an unprecedented environment for most investors, markets could behave in unprecedented ways.