Kiplinger’s Personal: Investing: The Three Potential Paths of the Economy | Business news

“The lack of conviction in the markets is evident,” credit analysts at BofA Securities wrote in a recent note to clients. “On the one hand, we have strong corporate and household balance sheets, a thriving labor market and no significant areas of economic overextension. On the other hand, we face raging inflation, geopolitical risk and mixed earnings.”

Kiplinger projects the economy to grow 2.5% in 2022, down from 5.7% in 2021. But there are many advocates on Wall Street for each of the three possible economic scenarios: recession, stagflation or expansion.

Preliminary estimates show that US gross domestic product fell at an annualized rate of 1.4% in the first quarter, adjusted for inflation – which already puts us halfway to a recession, given that they are often defined as two consecutive quarters on the decline. In contrast, the economy grew at a rate of 6.9% in the fourth quarter of 2021.

The Federal Reserve’s record for creating soft landings for the economy is not very comforting, with eight of the 11 tightening cycles since 1958 ending in recession, according to Deutsche Bank. The time from the start of interest rate hikes to the recession was long – usually about two years – so any recession is still a long way off.

But stock market highs preceded these economic downturns by an average of five months. Market strategist Ed Yardeni of Yardeni Research, for one, still believes we’ll avoid a recession — but the odds of one have increased, he says. “You have to be realistic. Now, instead of 15%, I think the chances are 30%. Maybe it’s time to raise the odds to 40%, but I’m not there yet.”

Instead, Yardeni sees a stagflation scenario in which the economy grows at a sluggish 2% with inflation retreating from today’s sky-high levels but remaining higher than we’re used to and lasting longer. Call it “stayflation,” he says.

It’s worth noting that stocks in general are a time-tested hedge against inflation. Going back 96 years, large-cap stocks have returned 10.5% annually, far outpacing inflation at 2.9%. Ryan Detrick, chief market strategist at LPL Financial, is optimistic.

The economy is experiencing a mid-cycle slowdown, not the end of an expansion. This is similar to what happened in 1994, he says. Then “the Fed hiked and the economy faltered, but eventually kept growing.”