According to the strategist, one of the factors pointing to a looming recession is the latest reading of the Leading Economic Index for the US, which fell by 1.2% in March, its lowest level since November 2020.
Furthermore, the standard timeline for a recession is about one year after the inversion of the Treasury yield curve, when yields on shorter-dated securities rise above those for longer-term ones. As the curve first inverted in March 2022, the economic downturn may well be just around the corner, Watling says.
“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,” he was cited as saying.
Just last month, the inversion intensified, reaching negative 103.1 basis points, which represented the largest gap between shorter-dated and longer-term yields since September 1981, when the American economy was in the early months of a recession.
Watling also warned of the consequences for equity markets once recession hits.
“They won’t come through it unscathed in our opinion. I’m not even sure about relatively. The reality is if you look at profit margins, they went to record highs in 2021 and a bit of 2022, and of course when you have a lot of inflation around, you can get very good operating leverage so you can get record high profit margins. When you get into recession, we’ve got to do a double hit on profit margins. You’ve got to normalize them back to normal levels and then you’ve got to price in a recession,” he explained.