Bear Market ‘Not Over,’ Even If We Avoid Recession: Morgan Stanley

Traders work on the floor at the New York Stock Exchange in New York on July 1, 2022. Seth Wenig/AP Photo

A brief bounce back in the stock market may be short-lived amid chronic inflation and the likelihood of a recession on the horizon, according to analysts at Morgan Stanley and Goldman Sachs Group, Inc.

“A counter-trend rally may continue, but make no mistake, we don’t believe this bear market is over, even if [the U.S. economy] avoids a recession,” Michael Wilson, Morgan Stanley’s chief investment officer, wrote in a new analyst note on Monday.

In the note, it was estimated that the odds of a recession over the next 12 months are now up to 36 percent, and pointed to increasing unemployment claims and declining job openings.

Wilson said he is “skeptical” about expectations that margin pressures would ease in the second quarter of the year.

“The combination of continued labor, raw material, inventory, and transport cost pressures coupled with decelerating demand poses a risk to margins that is not reflected in consensus estimates,” Wilson said.

Meanwhile, Peter Oppenheimer, chief global equity strategist at Goldman Sachs, told Bloomberg TV that while a slump in the stock market since the start of the year, driven by inflation fears, reflects investor expectations of a contraction in growth, he does not believe a deep recession is being priced in as yet.

“It’s premature to believe inflation is going to come down quickly or that the pressure has eased for the Federal Reserve and other central banks to tighten,” he said.

The analyst’s comments come as White House economic adviser Jared Bernstein admitted, on Monday, that inflation across the United States is “unacceptably high,” but he doubled down on the Biden administration’s narrative that a recession is not inevitable.

‘Folks Are Struggling’

“I want to be clear: there are lots of folks who are struggling with this high level of inflation; but as a macroeconomist, when you look at the stock of savings in the economy, it’s up there in the trillions,” Bernstein told “Fox News Sunday,” adding that Americans are “tapping those savings to continue to keep consumer spending strong.”

Bernstein pointed to job gains, adding that it is “very hard to conclude that we are in a recession.”

However, there is widespread concern that current sky-high inflation, which reached a new four-decade high of 9.1 percent in June, could prompt the Federal Reserve to hike interest rates by as much as 100 basis points next month.

Such a move could affect consumer activity in the economy while at the same time making the price of mortgages, vehicle loans, and business investments more expensive.

Fed Chair Jerome Powell is still hopeful that the central bank can accomplish a “soft landing”—that is, stabilize prices without causing a recession—despite a bevy of economists increasing the odds of the U.S. economy indeed falling into a recession within the next 12 months.

A recent Bloomberg survey of economists revealed that those odds have surged, to 47.5 percent, since June, up from 30 percent last month, while analysts at Wells Fargo & Company also forecasted that a recession could occur by the end of 2022 and the start of 2023.