Global markets have given away the gains that we saw at the beginning of the week amid rising recession fears. Several brokerages including Goldman Sachs and Citigroup have raised their odds of a US recession.
Citigroup has put a 50% probability of a recession. The brokerage is concerned about falling consumer demand. Notably, as US inflation is running at multi-decade highs and prices of nondiscretionary goods like food and gas have especially spiked, the average consumer is left with lesser money to spend on other discretionary items. Most retail companies pointed to a slowdown in sales of discretionary products during the recent earnings calls.
Retail companies also said that buyers were downtrading and buying smaller and cheaper packs amid rising prices. Rising inflation has been a big worry for both the US Federal Reserve as well as the Biden administration.
The US Federal Reserve has raised rates by 150 basis points so far, including the 75 basis point hike earlier this month. Fed chair Jerome Powell has reiterated his views several times that the US central bank is committed to taming US inflation. The Fed has also said that it does not intend to force a recession to bring down inflation.
Powell Says Its Rate Hikes Could Cause Recession
The Fed is front-loading its rate hikes and is far from over in the tightening cycle. The June dot plot called for another 175 basis point rate hike in 2022 and Powell has left the door open for a 75 basis point rate hike at the next meeting even as he said that these would not be “common.”
While responding to members of the US Congress on whether Fed’s rate hikes would cause a recession, Powell said “It’s certainly a possibility.” He added, “It’s not our intended outcome at all, but it’s certainly a possibility, and frankly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market.”
Powell also admitted that a soft landing for the US economy has become “challenging.” The Fed has said that several factors that are driving inflation like rising oil prices and global supply chain issues are beyond its control.
While President Joe Biden and other members of his cabinet have said that a recession is not inevitable, an increasing number of economists are now predicting a recession in the US. These include Larry Summers who headed the US Treasury during the dot com bust.
Goldman Sachs has also raised the odds of a US recession to 30% over the next year, which is twice its previous projection. Over the next two years, it sees a 48% chance of a US recession which is 13 percentage points higher than its previous forecast.
While US stocks have been falling amid recession fears, Bank of America expects them to bottom in October. It then predicts the S&P 500 rising to 6,000 by 2028.
Morgan Stanley Picks Stocks to Buy During a Recession
During a recession, most companies see a downwards revision in earnings. However, Morgan Stanley has picked several stocks that it believes to have the potential to see upwards earnings revision. These include Eli Lilly, Delta Airlines, Marathon Petroleum, Liberty Formula One, Endeavor, and Coca-Cola. Of these Marathon Petroleum, Coca-Cola, and Eli Lily are in the green this year. Also, Coca-Cola and Eli Lily are defensive stocks with good dividend yields.
Notably, Berkshire Hathaway chairman and legendary value investor Warren Buffett has also invested in Coca-Cola. The Oracle of Omaha opened up Berkshire’s cash coffers in the first quarter of 2022 and turned into a net buyer of stocks after five consecutive quarters of being a net seller.
Buffett has bet billions on oil stocks amid rising energy prices. He also bought more Apple stock while opening up new positions in several companies including HP and Activision-Blizzard.
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