The last 2 recessions have skewed the market’s expectations, and a coming downturn may not be as mild as some expect

Traders work on the floor of the New York Stock Exchange in New York on November 25, 2008.REUTERS/Lucas Jackson

  • Bank of America, Goldman Sachs, Morgan Stanley, and other banks have predicted a recession on the horizon.

  • But it’s too early to tell how severe it will be and predictions are likely skewed by the last two recessions.

  • Economists told Insider they didn’t think a recession would be as severe as 2008 or 2020, but it might not be mild either.

It’s been a chaotic year for markets as investors scramble to position for a recession that many top banks say is all but certain. Bank of America, Goldman Sachs, Morgan Stanley, and other major firms have called for a recession this year or next, with most analysts seeing at least a mild downturn hitting the US economy.

But the predictions of a “mild” recession are skewed by the experience of much deeper recessions in the past decade and a half, economists say, and it’s too soon for market watchers to say a potential downturn in the near term will be mild.

“The last two recessions really were extraordinary,” said Thomas Coleman, a lecturer at the University of Chicago’s Harris School. He pointed to 2020’s pandemic induced recession, which pushed the S&P 500 to fall 28% from its peak, and 2008’s housing-led financial crisis, which sent the S&P 500 tumbling by 48%.

But as jarring as those experiences were, they were unique in their severity and their impact on the market, Coleman told Insider. The last “normal” recession — or, a downturn that didn’t involve a once-in-a-generation event or a housing collapse — happened in 2001, with the bursting of the dot-com bubble.

That’s skewed the public’s perception of what a “normal” recession is, Coleman thinks, and is possibly leading some to forecast a “mild” downturn when that might not be the case.

The data is mixed on that. Inflation is showing small signs of cooling, although the Fed’s James Bullard has suggested that the central bank still has a long way to go. The job market is hot, but it is often before the start of most recessions, according to Bank of Montreal economist Douglas Porter.

“It’s still very much a fluid situation,” Porter told Insider. “I would actually push back on those who are saying if we have a recession, it will be mild. I don’t think that’s obvious at this point here.”

Yet, Porter and Coleman think that even in the worst-case scenario, an incoming recession won’t be as severe as what hit the economy in 2008 or 2020, offering some hope that investors will be able to weather a downturn if one arrives.

Those storms were “caused by a very unique set of negative circumstances,” Porter said, and in general, balance sheets of companies look much stronger than they did in 2008. The economy has shown its ability to push on despite a raging pandemic, and households are also buffered with more cash savings than in 2008 or 2020.

“Even though it’s been a weird cycle, I think it would be more of a traditional recession, and I don’t believe it would be as severe as 2008 or 2009, or as long lasting,” Porter said.

Read the original article on Business Insider

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