We think recessionary risks remain elevated because of hawkishness from the Federal Reserve that continues with rate hikes. It takes around 4 months to see a difference after a rate hike has occurred. We are starting to see the effects of earlier 2022 rate hikes, and what we need to realize is that there will come a time when all these aggressive rate hikes will have an impact to where everyone is saying recession.

Higher rates will lead to higher unemployment, and less spending power which will cure inflation. The effects though will lead to problems with economic growth. We are worried right now that the Fed wont be able to engineer the soft landing it wants, and damage is going to occur greater than anyone wants due to the nature of the rate hikes.

Higher interest rates also lead to lower corporate earnings, which we are seeing in earnings estimates for 2023. Estimates have been coming down, and lower earnings will lead to lower asset prices, and ultimately lower markets. To what magnitude of lower asset prices can we expect… that is to be seen.

Consumer demand will continue to weaken, and again I can’t predict to what magnitude. This will be a result of higher costs to carry debt, mainly credit card debt. Weaker consumer demand will result in weaker economic growth, thus leading to a contraction in GDP.