BlackRock Sees Recession Coming, Offers View on Stocks

'Central banks [are] pushing policy rates up to levels that damage economic activity,' BlackRock said.

Experts are divided about whether the Federal Reserve's interest-rate increases will cause a recession.

Count BlackRock, the world's biggest money manager, as one institution that thinks it will.

We are seeing a new regime "play out in persistent inflation and output volatility, in central banks pushing policy rates up to levels that damage economic activity, rising bond yields and ongoing pressure on risk assets," according to a commentary from BlackRock Investment Institute.

"Central bankers won't ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold."

On Dec. 13 the Bureau of Labor Statistics reported that the headline CPI for November rose about 7.1% from a year earlier. That's down from the 7.7% pace recorded in October and south of the Wall Street consensus forecast of 7.3%. It's the fifth straight monthly drop in the CPI.

(The Fed has raised interest rates by 3.75 percentage points since March. Consumer prices rose 7.7% in the 12 months through October.)

"We see central banks eventually backing off from rate hikes [next year], as the economic damage becomes reality," BlackRock strategists said. "We expect inflation to cool but stay persistently higher than central bank targets of 2%."

Implications for Financial Markets

The most important issue is "how much of the economic damage is already reflected in market pricing," they said. "Equity valuations don't yet reflect the damage ahead."

The strategists will "turn positive on equities when we think the damage is priced in or our view of market risk sentiment changes," they said. But "we don't see this as a prelude to another decade-long bull market in stocks and bonds."

Vanguard analysts also are pessimistic about the U.S. economy, seeing a 90% chance of recession next year.

"Significantly deteriorated financial conditions, increased policy rates, energy concerns, and declining trade volumes indicate the global economy will likely enter a recession in the coming year," they wrote in a commentary.

"Job losses should be most concentrated in the technology and real estate sectors, which were among the strongest beneficiaries of the zero-rate environment."

J.P. Morgan Analysts a Bit More Cautious

J.P. Morgan Asset Management analysts are a bit more cautious. "Near-term recession is too close to call," they wrote in a commentary.

"While a 2023 recession is quite possible, it should be a mild one if it occurs," said David Kelly, chief global strategist of at the firm.

"More importantly, with inflation continuing to fade and fiscal policy likely on hold, the Fed is likely to end its tightening cycle early in the new year and inflation could begin to ease before the end of 2023."

Meanwhile, "a slower-growing economy will likely temper wage demands, helping stabilize corporate margins after a difficult 2023," Kelly said.

"By 2024, the U.S. economy may well be back on a path that looks much like that of the late 2010s -- slow growth, low inflation, moderate interest rates and strong corporate margins."

And what are the implications of that?

"While this may not represent an exciting prospect for the average American worker or consumer, it is an environment that could be very positive for financial markets," Kelly said.