Are markets ready for an unlikely “average recession”?

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This week, Michael Metcalfe, global head of macro strategy at State Street Global Markets asks whether the equity market is already close to discounting an unlikely “average recession”.

“Our new KKT index* indicates a more than 90 percent chance of recession in the next six months, as parts of the economy shut down in light of the COVID-19 virus. Despite this, equity markets are now close to discounting the likelihood of an “average recession”. Over the past century, the average recession has lasted 13-months and seen a 25 percent fall in equities year-on-year.

“In keeping with the sudden fall in equities, it seems quite unlikely that this recession (if it happens) will be an average one. Historically, cyclical gauges such as industrial production fall around 10 percent over the course of a year, but for 2020, some estimate more than double that in a matter of months. Nevertheless, given the plethora of policy measures being thrown at it, and assuming the credit and labour markets hold, then the 2020 recession should be more of a sudden pause, rather than a stop, followed by a dramatic restart.”

 

*KKT Index

A new index that synthesizes economic data to forecast the relative likelihood of recession versus high growth.

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