Expert warns of recession, 40% drop in 2022

  • John Mauldin thinks a recession is likely coming this year.
  • He said he believed the Fed would tighten policy sharply to curb inflation, causing a slowdown.
  • He also said that the shares could take a drop of around 40%.

John Mauldin thinks things are going to get tough.

As the Federal Reserve begins to aggressively tighten policy to quell the highest inflation since 1981, the famed economist doesn’t believe the


Federal Reserve

will be able to compose their politics in a way that does not cause


recession

.

“Powell and his crew hope to engineer the legendary ‘soft landing,'” Mauldin said in a recent comment. “I really doubt they can do it.”

Recession talk intensified following the rise of the 2-year Treasury yield above the 10-year yield in March. So-called yield curve inversions have preceded every recession since the 1950s.

Some have downplayed the significance of the indicator, saying that many economic fundamentals are still strong and that Treasury yields are currently being manipulated by monetary stimulus.

But for Mauldin, who called the downturns of 2000 and 2008 and has worked in the markets since 1982, there are plenty of signs that this period is no different from past decades.

“We have many indications that a recession is near,” Mauldin said.

One is that the housing market is starting to see a slowdown in activity, according to Peter Boockvar, CIO of Bleakley Advisory Group. Experts like Ian Shepherdson, the founder of Pantheon Macroeconomics, and Solita Marcelli and Jonathan Woloshin, strategists at UBS, have said in recent weeks that they see a decline in activity and the pace of price appreciation as mortgage rates were rising and inflation was cutting budgets.

Second, manufacturing is decelerating, with new orders falling. Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, earlier this month cited poor PMI data as the reason he is bearish on stocks in the months ahead. He said he thinks the S&P 500 could fall as much as 13% before September. However, Wilson did not explicitly call for recession.

S&P 500 and ISM growth


Morgan Stanley


As a result, the shipping industry is also reporting a slowdown, Mauldin said, citing the perspective of FreightWaves CEO Craig Fuller.

Given the political pressure surrounding inflation, Mauldin told Insider on Friday that the Fed may institute rate hikes of 50 basis points beyond the next two meetings and will continue to hike until inflation begins to decline.

He said he believed a recession would likely occur in the third or fourth quarter of this year.

As for what a recession would mean for stocks, Mauldin said he wouldn’t be surprised to see the S&P 500 fall somewhere in the 40% range because the average


bear market

corresponding to periods of recession is about 43%. He said, however, that it was difficult to predict the extent of the market’s decline given the high weighting of the largest stocks in the index.

Mauldin’s views in context

Mauldin’s call for a recession in the second half of 2022 long predates the consensus on Wall Street right now.

In early April, Deutsche Bank economists Matthew Luzzetti, David Folkerts-Landau and Peter Hooper became the first on Wall Street to make a specific call for recession, saying they believed it would come around the end of 2023. They said a 20% bear market would likely precede it.

Credit Suisse‘s Jonathan Golub also told Insider this week that he believes a recession will occur in early 2024, roughly six months before or after. The economy and stocks are likely doing well for most of 2022, however, Golub said.

“If you look at the short end of the yield curve, the 3-month to 10-year yield curve, it’s over 2%. These are numbers that are just totally inconsistent with a recession,” he said. Golub.

He also cited strong consumer spending and savings, and an economist’s consensus GDP forecast of 3.3% for 2022. Golub’s S&P 500 price target for 2022 is 5,200, the one of the most optimistic among Wall Street strategists.

Goldman Sachs puts the chance of a general recession at 38% and has recently become more bearish on stocks and economic growth in the months ahead. But the bank’s chief U.S. equity strategist, David Kostin, has a price target of 4,700 on the S&P 500 for 2022. It currently sits at 4,392.

Former Fed adviser Danielle DiMartino-Booth told Insider in March that the Fed would raise rates “until something snaps.”

The economy looks relatively strong by employment standards—only 3.6% of Americans are unemployed and the US economy has had two strong jobs reports in a row .

But with inflation at its highest level in 41 years, the Fed is likely to tighten policy significantly. In such an unprecedented environment for most investors, markets could behave in unprecedented ways.

About Joel Simmons

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