The stock market could face further volatility next year as it has not yet priced in the likelihood of a recession, according to Goldman Sachs strategists.
In a Monday analyst note, the strategists – led by Christian Mueller-Glissmann and Cecilia Mariotti – said there is a 39% probability of a growth slowdown in the U.S. over the next 12 months. Despite that, risk assets are only reflecting an 11% chance.
“This increases the risk of further recession scares next year,” they wrote.
The analysis showed that equities typically rebound once inflation has peaked if the economy avoids a recession. If the U.S. enters a downturn though, stocks could decline another 10% on average in the six to nine months after the peak.
“The bear market is not over, in our view,” they wrote. “The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins.”
A separate Goldman analyst note last week from strategists Peter Oppenheimer and Sharon Bell predicted the bear market will continue into 2023, with the S&P finishing the year at 4,000 index points – up just 0.9% from Monday afternoon.
“The bear market is not over, in our view,” they wrote. “The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins.”
Despite a slight deceleration in consumer prices last month – inflation rose 7.7% annually, the slowest pace since January – there is still a growing consensus on Wall Street that the Fed will trigger a recession as it raises interest rates at the fastest pace in decades.
Officials this month approved a fourth consecutive 75-basis-point rate hike, lifting the federal funds rate to a range of 3.75% to 4% – near restrictive levels – and showed no signs of pausing rate increases.
“Let me say this,” Fed Chairman Jerome Powell told reporters on Nov. 2. “It is very premature to be thinking about pausing. When people hear lags, they think about pauses. It’s very premature, in my view, to talk about pausing our rate hikes. We have a way to go.”
