Alpha Trading Hub

Recession fears and the stock market — is it too late to play defense?

Recession fears are on the rise as the Federal Reserve gears up to fight inflation. Many stock-market investors are already playing defense and may wonder if those strategies have more room to run.

But first, how big of a worry is a recession? Google searches for the term have been solidly on the rise, according to trend data from the search giant charted below:

The fear is understandable. While the job market remains robust, inflation running at a four-decade high has consumers down in the dumps, according to sentiment readings.

Fed playing catchup

The Federal Reserve is seen belatedly scrambling to tighten monetary policy at a breakneck pace — including the potential for multiple, outsize half-percentage point increases in interest rates. It’s also contemplating a much faster wind-down of its balance sheet than in 2017-2019.

Fed officials, of course, say they’re confident they can tighten policy and bring down inflation without crashing the economy, achieving what economists refer to as a “soft landing.” There are prominent skeptics, including former Treasury Secretary Larry Summers, whose early warnings of surging inflation proved prescient.

Eyes on the curve

And then there’s the yield curve.

The yield on the 2-year Treasury note TMUBMUSD02Y, 2.493% briefly traded above the yield on the 10-year Treasury note TMUBMUSD10Y, 2.865% earlier this month. A more prolonged inverting of that measure of the curve is seen as a reliable recession indicator, though other measures that have proven even more reliable have yet to flirt with inversion.

Read: U.S. recession indicator is `not flashing code red’ yet, says pioneering yield-curve researcher

The yield curve, even when it does flash code red, isn’t much of a timing indicator for stocks, analysts have emphasized, noting that the period between the onset of the recession, as well as a market peak, can run a year or more. Nevertheless, its behavior is getting attention.

Source By: MarketWatch