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Relax, Wall Street Banks Agree Recession FUD Overblown

Last Updated September 23, 2020 1:07 PM
W. E. Messamore
Last Updated September 23, 2020 1:07 PM

Recession worries seem to be at an all-time high. A barrage of media reports from major financial news outlets like CNBC, Bloomberg, and The Wall Street Journal have filled recent months with fear, uncertainty, and doubt (FUD). Many of these speculative reports emphasize the slowdown in the manufacturing sector . Others chart a path to recession from Donald Trump’s trade war with China . But these narrow slices of analysis ignore the broader models in use by all the major investment banking institutions. Financiers Wells Fargo, Morgan Stanley, and Goldman Sachs forecast a recession is twice to nine times as likely not to happen in the next 12 months.

Wells Fargo: “Probably Not” Going to Be a Recession

Paul Christopher, Wells Fargo head of global market strategy, said  in his latest investment report:

“Trading driven by day-to-day news may produce poor investment outcomes and potentially create emotional stress… Eventually, an economic recession is likely, although probably not in the next 12 months. Recessions are a normal and expected part of economic and market cycles.”

Morgan Stanley Models 11% Recession Odds

Morgan Stanley’s full model of recession probability  over the next year forecasts recession odds as low as 11.4 percent. According to JP Morgan, the historical average probability of a recession is 17% . So right now, Morgan Stanley’s model actually forecasts a recession is less likely than usual. Taking into account financial variables only (such as the inverted yield curve), Morgan Stanley still considers a recession unlikely, with a 34 percent probability of one in the next 12 months. The investment bank’s strategists believe the real odds of a recession are somewhere between the two figures. They say there’s only a one in five chance of one in 2020.

Goldman Sachs: Less Than One in Three Chance of Recession

Sharmin Mossavar-Rahmani, chief investment officer of Goldman Sachs’ private wealth management division, reckons the odds of a recession in the next year are between 25% and 30% . In the Goldman outlook, it is twice or three times more likely that there won’t be a recession soon. She’s bullish on the U.S. stock market as well, advising investors:

“While you are in an expansion, the probability of a positive equity return is about 86%, so unless one has a high conviction that one is going into a recession, you don’t want to be underweight in equities.”

Google Trends: Recession FUD Subsiding

google search trends recession graph
Source: Google Trends

Meanwhile, Google Trends data show that recession fears are on their way out. U.S.-based Google searches for the query “recession” shot up in mid-August to more than five times the previous 12 months’ search volume. Since last month, however, “recession” searches have dropped by 80%. Google’s user base seems to be getting on board with big finance’s recession outlook.