How Bad will it Get?

David Bianco, DWS Americas CIO and Lori Calvasina, RBC Capital Markets Head of US Equity Strategy discuss how US consumers will fair heading into to a potential recession, and how investors are positioned.

Well thank goodness it’s friday. the weekend should be a reprieve. its all time high. this is this is a bear market. i find myself thinking about the 1970s lately. and i think something to keep in mind is that the 1982 bear market when the fed was fighting inflation aggressively back then the s&p fell 27 28 percent but in so i think a key question is is this the

Beginning of a high inflationary period. where are we near the end of a high high inflationary period the worst is largely behind and the market shouldn’t all right. i’m going to try to make you feel a so look we think that the market is set to stage a major major battle at the 30 500 level. and the reason for that is if you look back over the course of recessions into the

30s a median recessionary draw down is about 27 percent. and so we’ll get there when we’re around thirty five hundred on the s&p. quick or shallow camp. but do think there’s going to be a afterwards i think people are not really looking for anything major like what we had in the financial crisis. so i think that at least we’ve got that at our back. i will tell you if

You think about kind of where investors heads are at little bit better is i’m not sensing a do higher rates for longer mean for valuation multiples. and we’ve done some work suggesting that we’re probably getting pretty close. if he hit that 30 500 level on the s&p to the same kind of multiple contraction you saw back in the 70s over the course of the entire decade.

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But before that we just heard from lori to a recession. you’re projecting recession. normally if you have a recession we turn our heads and look at the fed and say ok please cut rates. do we have much room to really deal the recession. if and when it comes we’re expecting a short and shallow recession but we’re a we’re not expecting a v shaped recovery after the small

Recession. the trouble here is that the fed can’t rescue us because of the inflation problem and they can’t attempt to rescue the equity market or even the economy broadly until they’re confident that the inflation battle’s been won. committed to fighting inflation and they’ve decided they’re willing to risk a small moderate recession tolerate one to make sure that this

Inflation boost so if we’re talking about equities just discount rate affects that. also earnings earnings. we’re expecting earnings for 2022 to be two hundred twenty five dollars. shocks that we’re experiencing higher interest rates the super strong dollar the world even oil prices have come down so the earnings risk is mounting. what about earnings. consensus where it

To 18 for this year versus to eleven last year. and then we’re actually at 212 for next year on s&p earnings. so we think this is going to be pretty similar to 2015 2016 where earnings and i do think companies are much more resilient in terms of managing their business models than they have been in the past. more ways to manage through supply chains are improving.

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That takes a bite out of earnings because it takes a bite out of revenues. and particularly tie that into unemployment. because if we do go this direction what kind of unemployment are we facing. starting to see trade down impact. you’re seeing a lot of those references impacts among lower end consumers higher and has been holding them much better. but we do think the

Consumer is going to take some knocks. one of the things that gives me comfort is when i talked to my bank analyst for example they told me the starting points on various credit metrics are looking much better than they have heading into past recessions. so we think a lot of the consumer trends are going to head in the wrong direction but they’re not going to necessarily

Be hit as bad as they have in past cleaned up pretty strongly over the past few years then we’re thinking similarly that the consumer is having a tough time that got hit by this high inflation. rates affecting the housing market but this small recession should be marked by still an inflationary environment not deflation and we think the labor market will be relatively ok.

More than 1 percent. we’re usually goes up 3 4 or 5 percent so if it’s still inflation not deflation credit conditions credit costs. they should be benign. that should help the banks get through this very well and that should help income investing. so relatively benign. what we saw in the united kingdom this week was not benign. the short answer is no. however what’s

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Happening in the uk is a and that comes down to when you’re fighting inflation and your economy is suffering supply side shocks and other pressures. it is difficult to support the economy with monetary policy. fiscal policy. they also have deficits. so the united states needs to be a lot more mindful about its deficits whether this time of rising interest rates. so

Larry one more attempt to put this. we’re in better shape going in to this whatever this is than we were that time analysts who spend time scrutinizing the balance sheets of the big major banks. and we think the plumbing is in much tests do appear to have worked. that’s one of the reasons why banks but it is also one thing that i think is going to really be an asset to

The been adding this week. but on the banks specifically that’s right regulation. what about the part that’s not subject we don’t necessarily know what’s going because debt was so cheap and readily available for the past 10 20 years. but the banks just as laurie said were confident that their balance sheets are higher interest rates they should make but a resilient labor

Market. home prices may come down a little bit particularly they’re locked in the low rates from before.

Transcribed from video
How Bad will it Get? By Bloomberg Markets and Finance