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The U.S. economy would of course fall into a deeper recession, While any of the above scenarios are plausible, so are several
and earnings would collapse, at least for industrial non-financial variations. What isn’t likely to change is the fact this bear market will
companies. Markets cast their shadow before them and the eventually end, to be followed by a bull market. The only question
market would bottom at a much lower level than might otherwise will be from what level it begins and when. And that’s why the
be expected and as a deep recession becomes self-evident. The framework we’ve been advocating remains more important than
bottom would coincide with investors realising the Fed is forced to any of the headlines, bearish or otherwise.
recommence Quantitative Easing or ease rates again.
This article was written on 10 October 2022. All prices and
2. A moderate recession movements in prices are on this date
Scenario two is a more moderate recession brought about by the
Fed rate hikes already accomplished. The lag effect. Initially the
economy remains resilient, as it has done to date, but evidence of
economic damage becomes evident. Inflation begins to moderate,
as bottlenecks ease and unemployment begins to rise. If disinflation
then gains momentum, the U.S. Fed may be forced to reverse course
sooner. The market bottoms at a higher level than scenario one.
3. A soft landing

The final scenario is the preferred outcome, and not-so-secret hope,
of central bankers – the soft landing. Inflation eases rapidly and
materially rising unemployment is avoided through a normalisation
of job vacancies. The number of jobs available for each person
unemployed eases back from 1.7 by a gentle easing in economic
conditions. Under this scenario, the softening economy prompts the
Fed to pause, and the Fed Funds rate peaks. Rates may then head
lower again if required but may also remain at the paused rate
through the remainder of 2023. Disinflation and a positive, albeit
low, rate of growth sets the market up for a rally led by innovative
growth companies.

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