Davos Elite Can’t Agree About the Economy and Neither Can Markets

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The Problem As Many Executives Describe It: Current Business Is Great, But The Difficulties Ahead Are Clear

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“Here [in Davos] Everyone is a pessimist,” says Jose Vinales, president of Standard Chartered. “But when I ask them how their business is doing, the picture is amazing. It could be that the business captures reality. [very negative] Macro-political reality. ,

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This division helps explain why business and banking leaders in the elite mountain gathering have so many different views. Bank of America chief Brian Moynihan-pooh-pooh those focused on strong consumer-spending data, including recessionary thoughts. Those watching the storm clouds from afar are really worried.

George Oliver, president and CEO of heating and air-conditioning manufacturer Johnson Controls, is typical of the positive current business. “We are doing very well,” he said. “We see strong demand … we are clearly watching this closely.”

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On the other side are a series of financiers and officers focused on the war, Energy crisis, food crisis, rebuilding geopolitics and retreating from globalization.

Douglas Sieg, managing partner at Lord, Abbett & Company, fund manager, says: “It’s amazing that six months ago the world didn’t feel so complicated and suddenly the last three months were nothing but major issues.”

For now, Wall Street has focused on good current earnings more than threats. Despite all the talk of a possible recession, S&P 500 earnings forecasts for this year and next have risen this year. Analysts are still making forecasts more advanced than cutting.

True, valuations are low — very — but not primarily because of the high risk of a recession. Instead, it reflects expectations of far higher interest rates. The valuation multiplier of expensive stocks that are well placed to weather economic weakness is much higher than companies — usually cheaper in the beginning — that benefit from a roaring economy.

Markets have been saying that the Fed’s plans, combined with easing supply-chain and energy problems, will bring inflation closer to the 2% target after a few years, without Chairman Jerome Powell needing to repeat the recession-inducing peak rate. without the rise of his predecessor Paul Volcker in 1980. But the consensus is not strong, and major investors disagree on both sides.

Scott Minerd, chief investment officer at Guggenheim Partners, thinks what the Fed is planning is already too much, and will hurt growth.

“The Fed is being very aggressive but has no political will to stand apart,” he said. Stop printing money and “inflation should slowly burn itself out.”

If he is correct, the Fed will stop tightening monetary policy earlier than expected for inflation to retreat, and bonds will be an attractive investment. But the opposite bet is backed by hedge-fund giant Bridgewater.

“There is a high chance that inflation will self-reinforce,” said Bob Prince, co-chief officer of the investment. “The odds are on the side that they [the Fed] Don’t do enough and do too little, do too late, which has been the pattern so far. ,

To some extent, the differences show up in the form of deep uncertainty in the markets, which hurts stocks. S&P 500 . Vix Index of Implicit Volatility on has sat above 25 for five weeks, something it hasn’t done since 2020 and the pandemic uncertainty, and before that in 2011, when the Fed unleashed its unusual Operation Twist Easing policy. But Vix is ​​well below the level of actual panic.

The ideal outcome is that the recession may be delayed, or at least mild, as strong consumer spending is sustained by the bank’s willingness to provide full employment and lending, even in energy and supply-chains. The pressures are reduced and the Fed action lets out some of the heat.

But in my view, it’s an increasingly fine line to walk. If that turns out to be wrong, there’s plenty of room for a drop in earnings estimates and a steep drop in stocks.

Write to James Mackintosh at [email protected]

Credit: www.Businesshala.com /

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