In a new report, Bank of America analyst Ethan Harris discussed the
recent market action in response to China and looked at the probability
that the S&P 500’s decline is indicative of a recession on the
horizon in the United States.
Despite a relatively high score on the firm’s recession probability
indicator, Harris urges traders not to panic about the possibility of a
recession.
Rate Hike Coming
Despite the injection of fear into the markets during the past week,
Harris does not believe that the FOMC will allow stock market turbulence
to influence its decision to raise rates on September 17. The latest
employment numbers indicate a very strong labor market, and the FOMC has
been emphasizing a strong jobs market as the key to its eventual target
of 2 percent inflation.
In addition, the U.S. GDP growth rate of 3.7 percent in Q2, as well as
Bank of America’s projected 2.8 percent Q3 GDP growth rate, indicates
that the underlying U.S. economy is strong, regardless of the movement
of the recent shakiness of the S&P 500.
Not Completely Disconnected
Although there is no direct link between equity market movement and
underlying economic strength, there are ways that the stock market
indirectly influences the economy. However, Bank of America determined
that only 2 cents out of every $1 of financial market wealth goes to new
consumption.
“Using our model, we estimate that the S&P 500 would need to
decline to an index level of 1600 (implying another 20 percent drop from
today’s level) and stay there to shave off a full one pp from household
spending growth,” Harris added.
Recession Watch
The firm’s recession probability model is currently indicating a 47
percent chance of a U.S. recession sometime in the next 12 months.
However, Harris cautioned that the indicator is prone to false signals.
He included an old Paul Samuelson quote about using the stock market to
predict recessions: “The stock market has called nine out of the last
five recessions,” Samuelson famously joked.
The Bank of America recession indicator peaked at around 59 percent back in 2011 without any subsequent recession.
