Deutsche Bank warns of a 20% bear market in 2023

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Deutsche Bank made waves on Tuesday when its economists became the first of Wall Street’s top analysts to say the US economy would soon slip into recession.

“Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have prompted us to revise down our global growth forecast significantly,” Deutsche Bank economists, headed by David Folkerts-Landau and Peter Hooper, he wrote in a 68-page note to clients. “We are now projecting a US recession and a growth recession in the euro zone in the next two years.”

But it reflects growing concerns about the economy, especially as the Federal Reserve moves aggressively to cool business activity in its efforts to fight inflation. And last week’s inversion of the 2:10 yield curve, a metric with a fairly good track record of predicting recessions, only buoyed those who expected economic growth to turn negative.

Bearish scenario in the stock market with a bearish figure in front of the price fall chart in red.

And as TKer readers know, recessions are not good for stocks. The S&P 500 has fallen on average between 20% and 30% during these periods.¹

Deutsche Bank sees the stock market following the historical playbook. From Bank Equity Strategist Binky Chadha (emphasis Chadha):

We maintain our forecasts for the S&P 500 (5250) and the Stoxx 600 (550) for the end of 2022; with a typical 20% recession correction by the end of 2023. Our projections for equity supply and demand this year suggest equities should be well supported by strong inflows, a recovery in positioning at least a little above neutral, and buybacks, but this support should start to slow with growth. in the second half of next year. We see some impacts, albeit limited, on European gains from the Russo-Ukrainian war and recovery of multiples. In 2023, we expect equity markets to hold up well through the summer before the US slips into recession and for equities to correct by a typical 20% at the start, before bottoming out at the midway point and recovering to levels previous.

It may be easier for clients to swallow a 20% drop in stock prices when you call it a “correction.” But in case there is any confusion, a 20% drop is more popularly known as a bear market.

Reality check 🙋🏻‍♂️⚠️

I’m not going to tell you that a recession isn’t likely, any more than I’m going to tell you that bear markets aren’t likely.

Recessions happen. And big sell-offs and bear markets happen. This is what you sign up for when you invest in the stock market.

But I caution against trying to time the market (ie trying to sell at the top and buy at the bottom). Most professionals have not even been able to do this successfully.

Some of the biggest short-term gains in the market occur during periods of high volatility. Therefore, those who dawdle in the market will end up missing out on significant profits that can do irreparable damage to returns in the long run.

And history says that there is only a very short window between when stock prices peak and when recessions hit, meaning the risk of you selling too soon is high.

“In the past, the S&P has made gains up to 6 months before the start of a recession,” said Andrew Garthwaite, director of global equity strategy at Credit Suisse, wrote in a note to clients on Tuesday.

Unfortunately, the information on the Garthwaite chart could be tradable only if you know exactly when the recession will start. And that is virtually impossible to do.

By the way, if you decide to try to time the market and try to sell to avoid what may or may not be a recession-related selloff, make sure you have a plan to buy back. Remember: There is a chance that the stock will never fall below the price at which it could have been sold.

Relevant TKer reading:

1. These averages vary depending on how far back in history you go and how you rate the price movements that may be associated with each recession. However you measure it, everything is bad.

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