US recession likely, with soft landing “wishful thinking” – BCA Research

Investing.com – The consensus expectation of a soft landing for the US economy is wishful thinking, according to BCA Research, and the world’s largest economy will fall into a recession later this year or in early 2025.

“We resisted the consensus narrative in 2022 that a US recession was imminent,” said analysts at BCA Research, in a note dated Sept. 27. “We then predicted an immaculate disinflation for 2023, which kept us tactically bullish on stocks. But now we have joined the dark side and are calling for a recession to start within the next six months.”

Stocks cheered the Fed’s decision to cut rates by 50 bps earlier this month, the investment research company noted, a reaction that harkened back to January 2001 and September 2007, which also marked the start of the two biggest easing cycles this century. 

In both cases, the Fed surprised investors by cutting rates by 50 bps. In 2001, the S&P 500 gained 5.0% on the day of the unexpected rate cut. In 2007, it gained 2.9%.

Unfortunately, in both cases, stocks fell significantly over the subsequent months. Back then, although it was not obvious at the time, the Fed was behind the curve. This time is unlikely to be any different. 

“We  continue to expect the US to succumb to a recession later this year or in early 2025.”

The US unemployment rate has already risen by enough to trigger the Sahm rule, while other recession indicators are also flashing red. Additionally, income growth is likely to fall over the coming quarters, which should curb spending growth. 

“We were tactically bullish on stocks for most of 2023, moved to benchmark early this year, and then went underweight at the end of June,” said BCA Research. “We expect the S&P 500 to drop to 3800 during the coming recession.” 

“Accordingly, we recommend that investors underweight stocks and overweight government bonds.”

The 10-year Treasury yield will fall to 3% in 2025 while the fed funds rate will reach 2%. The US dollar should weaken modestly over the next few months but will then strengthen during the next recession. The yen is our favorite currency going into 2025.