US Recession Likely, Soft Landing Viewed as “Wishful Thinking” – BCA Research

According to BCA Research, the prevailing belief in a soft landing for the US economy is unrealistic, predicting instead that the nation will enter a recession later this year or early 2025.

In a note dated September 27, analysts at BCA Research remarked, “We resisted the consensus narrative in 2022 that a US recession was imminent. We previously anticipated an immaculate disinflation for 2023, which kept our outlook on stocks optimistic. However, we have now shifted our stance and are forecasting a recession to begin within the next six months.”

The stock market reacted positively to the Federal Reserve’s decision to cut interest rates by 50 basis points earlier this month. This response is reminiscent of similar circumstances in January 2001 and September 2007, when the two most significant easing cycles of this century commenced. In both instances, the Fed surprised investors with a 50 basis point rate cut, resulting in a 5.0% increase in the S&P 500 on the day of the cut in 2001, and a 2.9% gain in 2007.

However, history shows that in both cases, stocks fell considerably in the following months. Though not evident at the time, the Fed was lagging behind the economic curve, and this situation is unlikely to differ this time around.

BCA Research maintains, “We expect the US to fall into a recession later this year or in early 2025.” The US unemployment rate has already seen enough of an increase to activate the Sahm rule, and other recession indicators are signaling concern. Moreover, expected declines in income growth may limit spending growth in the coming quarters.

The firm added, “We were strategically positive on stocks for most of 2023, moved to benchmark early in the year, and subsequently went underweight at the end of June. We anticipate the S&P 500 could drop to 3800 during the approaching recession.”

As a response to these predictions, BCA Research advises investors to underweight stocks and increase their holdings in government bonds. They project that the 10-year Treasury yield will decrease to 3% by 2025, while the federal funds rate will fall to 2%. Although the US dollar is expected to weaken slightly over the next few months, it should strengthen during the subsequent recession. The yen is considered the preferred currency as the world approaches 2025.