A recession is coming — and maybe a bear market, too

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Gary Shilling: The recessionary indicators are numerous

I first suggested the U.S. economy was headed toward a recession more than a year ago, and now others are forecasting the same. I give a business downturn starting this year a two-thirds probability.

There is, of course, a small chance of a soft landing such as in the mid-1990s. At that time, the Fed ended its interest-rate hiking cycle and cut the federal funds rate with no ensuing recession. By my count, the other 12 times the central bank restricted credit in the post-Second World War era, a recession resulted.

“Recession” conjures up spectres of 2007-2009, the most severe business downturn since the 1930s in which the S&P 500 Index plunged 57 per cent from its peak to its trough. The Fed raised its target rate from 1 per cent in June 2004 to 5.25 per cent in June 2006, but the main event was the financial crisis spawned by the collapse in the vastly-inflated subprime mortgage market.

The 1973-1975 recession, the second deepest since the 1930s, resulted from the collapse in the early 1970s inflation hedge buying of excess inventories. That deflated the S&P 500 by 48.2 per cent. The federal funds rate hike from 9 per cent in February 1974 to 13 per cent in July of that year was a minor contributor.

 

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