The CEO of Longview Economics, Chris Watling, has indicated that recent US economic data points towards an impending recession, which could cause turbulence in the stock market. In a recent interview on CNBC’s “Squawk Box Europe,” Watling highlighted concerning leading economic indicators. On Thursday, The Conference Board announced that the Leading Economic Index for the US declined by 1.2% in March, reaching its lowest level since November 2020. This data suggests that economic frailty may soon escalate and impact the entire US economy.
The Inverted Yield Curve and Recession Timeline
Watling also noted that the typical timeline for a recession following the inversion of the Treasury yield curve is around a year. The yield curve first inverted in March 2022 and subsequently inverted again in the following months. He stated, “Every time you’ve had that in the US, you’ve had a recession. So, I think it’s coming, it’s on its way. It’s just a timing issue.”
Despite widespread concerns about an approaching recession, the International Monetary Fund (IMF) recently expressed surprise at the resilience of the US labor market and consumer spending. On April 11, the IMF released its latest World Economic Outlook report, which predicted a 1.6% expansion of the US economy this year, up from the 1% forecast in 2022.
Stock Market Faces Challenges Amid Economic Downturn
Gita Gopinath, the IMF’s first deputy managing director, stated that cooling inflation data gave them reason to believe the US economy might dodge a recession. However, she acknowledged that a so-called hard landing was still within the realm of possibilities.
When asked if equity markets could withstand the anticipated economic downturn, Watling expressed skepticism. He argued that profit margins reached record highs in 2021 and early 2022 due to inflation, which allowed for substantial operating leverage. As a recession looms, profit margins will face a double hit, requiring normalization to regular levels and accounting for the recession. Watling believes that current earnings expectations are overly optimistic, and the stock market will inevitably have to grapple with these challenges.
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