Finance

Strategists say the Fed needs to ‘kill the zombies’ with a recession triggered by high rates before investors can buy more stocks


Recession coming in 2024Getty Images

  • Canaccord’s Tony Dwyer said investors would need to wait for a recession and subsequent interest rate cuts before putting more cash into stocks.

  • He described the U.S. economy as a “zombie” that needs to be “killed” before recovery can begin.

  • Dwyer said that in this case, the Fed would keep interest rates higher for a longer period of time to trigger a recession and then cut interest rates.

Tony Dwyer, chief market strategist at Canaccord Genuity, said that the Federal Reserve needs to maintain higher interest rates for a longer period of time to trigger an economic recession and thereby wipe out the half-dead U.S. economy. Only in this way should investors invest more cash into the market.

talking CNBC On Thursday, Dwyer pointed to signs of weakness in the economy, with some forecasters warning A recession may be comingDwyer said that this is actually good news for investors, because the economic downturn is the buying opportunity that investors need to wait for:

“You need to kill the zombies. And the zombies are the economy you’re waiting for [a downturn] “Because the yield curve is inverted and interest rates rise, the economy slows down enough to enter a recession,” he said. “If inflation and interest rates come down and concerns about rising unemployment begin, that sets the stage for a real early-cycle recovery.”

Federal Reserve officials have raise interest rates 525 basis points to lower inflation, a move that risks over-tightening the economy and tipping it into a downturn.

A series of weak data points suggest the economy is slowing. Unemployment rate remains near historic low in FebruaryDwyer said that’s partly because the Bureau of Labor Statistics saw a response rate of just 27% from businesses in its last jobs report, suggesting hiring conditions are weaker than they appear on paper.

Dwyer said corporate earnings also look to be in trouble, given that much of the earnings growth in 2023 is due to the “Big Seven,” a group of giant tech stocks that have soared on Wall Street’s enthusiasm for artificial intelligence. Beyond those seven stocks, he said earnings growth will be negative in 2023 and is expected to be negative this quarter as well, citing data from London Stock Exchange Group (LSEG).

While stocks have hit a series of record highs this year, not all markets are doing well. For example, small-cap stocks have underperformed the S&P 500, Russell 2000 It was only 5.5% higher than the level at the beginning of the year.

The economic slowdown could prompt the Federal Reserve to cut interest rates, a monetary easing tool that investors have been eagerly awaiting. The market generally expects the Federal Reserve to cut interest rates by 75 basis points or more this year. CME FedWatch Tool.

“At this point, when you’re so overbought and you’re so extreme on the upside and you just want to wait for better opportunities, in our view, as the jobs data worsens leading to rate cuts and you worry about the economy — that’s when I want to go in time,” Dwyer added.

Some Wall Street forecasters warn that interest rates could remain higher for longer as the Fed looks to avoid a resurgence in inflation. But that will only trigger a deeper recession because economic growth is already slowing, Dwyer warned.

While a growing number of economists are enthusiastic about the prospect of a soft landing, the likelihood that the U.S. will slip into recession next year remains high. An economic indicator called the “full model” shows that the U.S. economy is still very likely to fall into recession. The probability of a recession in the next 12 months is 85%, the highest chance of recession since the financial crisis.Meanwhile, the New York Fed forecast The probability of a recession is 58% until next February.

Read the original article business insider



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