Most corporate leaders now expect a recession as soon as next year. This is what it means for investors.
A survey released Friday from the Conference Board reveals that 60% of corporate suite officers are convinced the economy will contract by 2023. Fifteen percent believe a recession has already begun.
It’s a big red flag for investors in the near term, with one caveat.
During the past two decades the world has been busily building most of its factories in Asia, specifically China. At the same time, the rise of environmental, social and corporate governance investing made it difficult for capitalists to invest in fossil fuels, ceding power to Saudi Arabia and Russia. Unfortunately, none of these countries are especially friendly toward the West.
Now the Chinese government is randomly closing domestic factories, creating supply chain shortages. Russia is at war with Ukraine, producing commodity shortages for grain, oil and natural gas. And Saudi Arabia refuses to pump more oil to ease the price shocks.
Interest rates are rising to quell inflation in the United States, and across the globe. It’s a complete mess without an easy fix. It is no wonder CEOs are worried.
The Conference Board survey was put to 750 CEOs and other C-Suite level executives. They were asked about their feelings on the war in Ukraine and how their businesses were being impacted, the risks to supply chains, cybersecurity, contingency planning, and innovation. The outlook was grim.
Corporate leaders in ESG-related companies were most pessimistic. Some 42% saw a recession by mid-2022, with an additional 40% expecting the downturn within the next two years, according to the report.
This is an unprecedented era.
Only two years after a global pandemic plunged the world economy into recession, central bankers around the world are creating another one to halt runaway inflation.
The Federal Reserve last week hiked short term rates by 75 basis points, the biggest hike since 1994. And Fed Chairman Powell did not rule out further large hikes at future meetings.
The CEOs see margin compression. They are battling rising interest rates coupled with higher raw material costs. Worse, they are worried about competing economic blocs as Chinese and American economic interests diverge. The era of lower cost, Chinese-made goods may be coming to an end, and the price deflation that came with it.
Jamie Dimon, CEO at JP Morgan (JPM), warned earlier this month that the global economy faces at economic hurricane. Jane Fraser and James Gorman, CEOs at Citigroup (C) and Morgan Stanley (MS) respectively, are more measured. Both see the possibility of recession growing, yet still avoidable.
Tesla’s Elon Musk is somewhere in the middle. In an email obtained by Reuters, Musk told Tesla executives that he had a “super bad feeling” about the economy. He then directed managers to begin cutting 10% of salaried employees in anticipation.
There is some good news, though.
Corporate leaders are still committed to investment in new technologies to automate their workflows and protect digital data. This means greater investment in cloud-based technologies and cybersecurity. Together, this is the continuation of the digital transformation wave that was responsible for so much investor wealth creation during 2020 and 2021.
Unfortunately, the underlying tech stocks are nowhere near beginning new uptrends. Most stocks are trading well below all of their major resistance levels, including the all-important 200-day moving average.
While I am not suggesting any new investment at this time, investors will be wise to watch sector leaders such as Microsoft (MSFT), Palo Alto Networks (PANW), and MongoDB (MDB), a fast-growing maker of next-generation databases.
If corporate leaders are any indication, the rest of 2022 might be a whirlwind for investors. Storm clouds are definitely on the horizon. That said, the bigger digital tailwind remains in place.
Watch the price action for leaders. When they start rising the next leg higher will begin.
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