ASX to rise, Wall Street’s rally proves fleeting

Goldman Sachs’ Vickie Chang argues in a note that the sell-off on Wall Street could stretch well into the second half of the year.

“While history shows that actual Fed easing has generally been necessary to put a floor under monetary policy-induced corrections, we have speculated that a sign that the end of tightening is in sight might be sufficient in an era where forward guidance and financial conditions are more important.

“If we take a shift to 25bp rate hiking increments as one possible indicator of reaching that point, our current baseline forecast now envisages that this point will not be reached until the November FOMC [Federal Open Market Committee]where before we had seen it as possible in September.”

Chang also wrote that if the US economy entered into a recession, it would look most like the early 1970s or the early 1990s recession in terms of these macro parameters – moderately high inflation, some macro equity overvaluation, no significant private sector imbalances, and a modest increase in the unemployment rate on our forecasts.

And yet, the equity correction in the 1969-1970 recession was almost twice the size of the 1990-1991 recession – and this current equity sell-off was already more severe than the 1990s example, she also said.

Chang said “our analysis overall suggests that it may be easier to define the point at which equity markets could trough – at or close to the point at which the Fed shifts away from its current tightening – than to be confident about how far equities will have fallen when that point is reached”.

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