- Chun Wang, portfolio manager at The Leuthold Group, thinks a recession could grip the US economy in as little as six months.
- He says the coronavirus accelerated a weakening market trend, and thinks “there is more downside to come” before all is said and done.
- Wang says the Federal Reserve missed a golden opportunity to calm markets by cutting interest rates by 100 basis points, and now its influence may be limited going forward.
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The speed and ferocity with which global markets have deteriorated is astonishing. In just a handful of trading sessions, fears of a global pandemic cratered stocks worldwide, ending history’s longest bull market.
“Recession risk has risen dramatically over the last couple months,” said Chun Wang, portfolio manager at The Lethold Group, on “Money Life with Chuck Jaffe, an investing podcast. “We could be looking at recession within the next six or 12 months.”
He continued: “It really depends on how long and how severe this limbo is going to last.”
When Wang refers to “limbo,” what he’s referencing is the level of ambiguity surrounding the coronavirus’ impact on the economy. Right now, he thinks the potential outcomes are fraught with uncertainty — and policy makers aren’t helping the cause.
“One thing we can say for sure is that it’s unlikely to get a lot of clarity anytime soon regarding the coronavirus — and that’s probably a fact,” he said. “On the other hand, we know for a fact that policy responses so far have been behind the curve, especially on the part of the Fed.”
Although the Federal Reserve surprised markets with a 50 basis point interest rate cut last week, it did little to stop market turmoil. Wang thinks the gesture was too little, too late — and he says the Fed’s maneuver was a missed opportunity to “shock and awe” the market by cutting interest rates by 100 basis points.
“You got to get in front of the curve — get ahead of the curve to actually provide any benefit in terms of stabilizing market sentiment,” he said. “I don’t think we’re going to see anything like that.”
To Wang, markets were starting to deteriorate long before the coronavirus hit the headlines. He says that weakness in cyclical stocks, value stocks, small-cap stocks, and emerging markets was palpable before panic started to spread. The prevalence of the coronavirus took a trend that was already in place and exacerbated it at the worst possible time.
“We basically think coronavirus is an accelerator, not a catalyst,” he said. “Basically, we think if consumers and businesses — like you said, hotels — change their behavior and start to pull back, we could be looking at recession within the next six or 12 months.”
With all of that under consideration, Wang thinks it’s still too early to say that a bottom in stocks has been carved out.
“We think there is more downside to come,” he said. “Valuation, on one hand, is still too high to provide a safe, longer-term entry point — and the technical picture, on the other hand, has deteriorated enough to point to a weaker trend going forward.”
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