The global economy has emerged from an era of stable growth and inflation for four decades to enter a period of increasing instability, while a new system that weakens predictability will remain, according to what the world’s largest asset manager sees.
A recession is approaching around the world as central banks aggressively raise borrowing costs to tame inflation, BlackRock said, noting that market turbulence will intensify this time around like never before.
This means policy makers will not be able to support the markets as they have been in previous recessions, BlackRock’s strategists team led by Vice Chairman Philip Hildebrand wrote in the Global Outlook 2023 report.
They said: “A recession is predicted as central banks seek to curb inflation. Unlike previous recessions, central banks will not come to the rescue when growth slows in this new system, contrary to what investors expect.”
“The stock valuation does not reflect future damage,” they added.
The prospect of limited political support means investors need a more dynamic approach, including more frequent portfolio changes and “a closer look at sectors, regions and asset subclasses to navigate future volatility,” BlackRock said.
What worked in the past won’t work now, strategists say, and the old principle of buying at the bottom does not apply to this system of sharper trade-offs and macroeconomic fluctuations.
And they continued: “We do not see a return to conditions that will support the general bull market in stocks and bonds, as we have witnessed in the previous decade.”
Wall Street banks ranging from Morgan Stanley and Bank of America to Deutsche Bank have warned that US stocks could fall more than 20% in 2023 due to the economic downturn and liquidity risks caused by the Federal Reserve’s interest rate hike.
David Solomon, CEO of Goldman Sachs, believes that there is only a 35% chance that the US economy will avoid a recession.
signs of a recession
According to BlackRock, the housing market downturn, delays in corporate investment plans, shrinking consumer savings and worsening CEO confidence are early signs of the next recession.
However, experts said that the stock market has not yet taken into account the potential scale of the impending economic downturn, according to Business Insider.
They added: “We don’t think stocks fully factor into a recession… Corporate earnings expectations do not yet fully reflect a modest recession.”
The US S&P 500 index of large stocks rose more than 12% from its 23-month low in October, largely due to expectations that the Federal Reserve will slow down the pace of interest rate hikes after the recent decline in inflation.